The Covid pandemic, followed swiftly by the Ukraine conflict, has left (already unpredictable) capital markets volatile, interest rates on a steady rise, inflation on a steep upward trend and a slowing UK economy. All of these factors make borrowing (particularly the borrowing of long-term capital) challenging.

The key challenge for a borrower is that if they fail to plan ahead for their future borrowing requirements, they could, at a later date, find themselves paying significantly more for their funding than they had originally anticipated. Borrowers might also find that if they commit to financial covenants based on current market conditions - without appropriate stress testing/future-proofing - the risk of covenant non-compliance at a later date increases significantly.

How does one counter these risks I hear you ask? Well, as Tariq Kazi, director of corporate finance at Optivo, rightly determines, having more sources of funding and having access to more funding than one needs at the time, has to be a step in the right direction. Diversification then is the key.

Whether a borrower satisfies its borrowing requirements through traditional debt (whether term loans or revolving credit facilities), private placements, bonds or aggregator funding lines, the key is to have access to borrowings that are more than is strictly needed at the time (within reason) and to spread such funding across a range of financial products, financial terms and financial institutions. By diversifying a debt portfolio and the terms on which that debt is borrowed you can be better placed to weather financial downturns, better placed to respond quickly to unexpected developments and better placed to evidence prudent financial management/governance to the regulatory bodies.

Optivo’s recent £73m local authority funding transaction is a perfect example of a housing association diversifying its debt portfolio and ensuring access to significant capital (at respectable rates) to sit alongside what we can assume are more traditional funding lines. 

As we advised the nine local authorities in relation to this syndicated funding transaction, we are well placed to assist other housing associations with their diversification journeys too! Please do get in touch with Jon Coane or Michael Nutman if you would like to explore diversification in more detail.