As the Homes and Communities Agency (HCS) has recently warned about the increasing mark to market liabilities of Registered Providers (RPs), we consider how RPs can prepare themselves to meet collateral calls on short notice.
Associations should, of course, be continuously monitoring their facilities and stress-testing their ability to cope with increased exposures as a result of changes in market conditions. Typically, with variable rate loans, the concern is when interest rates rise. Conversely, the mark to market exposures currently being felt by the sector result from the prevailing low interest rates. The regulator’s warning highlights that mark to market liabilities arising out of swaps and other derivatives can substantially increase in a relatively short period and result in calls from lenders or derivative counterparties for cash or other collateral. Inside Housing reported on the regulator’s survey that showed exposures increasing from £1.1bn in September 2014 to £1.9bn in December 2014 with additional collateral of £300m provided in December 2014 – a very rapid rise in a short period.
However, what further steps can associations take to prepare themselves in the event that they receive a collateral call? While some calls may be met from existing cash resources, this will inevitably put a strain on liquidity so most RPs will prefer to provide further property security as collateral for their exposures or to enable them to draw down on other facilities. The charging process does take time – which is at a premium in these circumstances - but can, with the right preparation and good advisers, be rapidly accelerated where necessary.
Preparation for charging starts at acquisition. Clearly, you want to identify and avoid any title issues that could cause problems with charging in the future. But even where there are no legal issues, a core part of the charging process is to be able to provide a complete set of documentation relating to the properties to be charged. At the point of acquisition, RPs should be looking to put together the documentation that they will need in the future if the properties are to be charged. Ideally, this will be in a well-organised, readily accessible electronic form - rather than a file of papers gathering dust in a corner! In-house or third party electronic data rooms can be a good solution for storing and organising these documents. We have used our extranet facilities with a number of RP clients to facilitate the storage and sharing of key documentation.
You should review existing portfolios and get them into a position where they could be ready to charge on short notice. A relatively brief “health check” of the title and planning position can often identify issues that will need to be addressed in the charging process or gaps in the documentation. The earlier this is done, the better, as this gives more time to sort out issues.
Also consider charging property portfolios that are at the “ready to charge” stage as undesignated security which can be held by the security trustee in readiness to be allocated as security for mark to market exposures or in order to draw down further funds from other facilities which can be used for cash collateral. As there is a cost to doing this, both in terms of legal fees and loss of flexibility in dealing with those assets, it is important to realise that, even where security is “undesignated”, the ability to withdraw it from security will be limited and subject to conditions. However, security in this position is at the highest state of readiness.
These exposures clearly create challenging conditions for RPs. However, good preparation can greatly simplify the process for RPs to deal with any calls for extra security they may face. Penningtons Manches has considerable experience of advising RPs on planning and implementing their security charging projects. Our detailed knowledge of the charging process and the requirements of the major lenders in this sector and their regular legal advisers enables us to readily identify areas of concern – whether at the point of acquisition or later - and to recommend ways to remedy any problems.