Whilst for many social housing providers a social rent cap of 7% (in England and Scotland) will have been less painful than feared, one cannot escape the reality that this has been a rather painful 12 months for social housing providers (and the housing sector generally).
Whether it is the rent cap, labour shortages, material shortages, the hike in inflation, the jump in interest rates or the UK recession generally, what the Regulator of Social Housing (the Regulator) dubs a 'challenging and turbulent' period is likely to continue and will likely become even more ‘challenging and turbulent’ as we enter 2023.
Rather unsurprisingly, the Regulator’s quarterly survey confirms that these economic challenges are already starting to have an impact on social housing providers’ finances and points to a recent deterioration in the level of interest cover as just one example (it provides a few) of where social housing providers may be exposed.
According to the Regulator’s quarterly survey, the sector’s interest cover, based on operating cash flows (excluding sales), averaged 92% over the 12-month forecast period which is not only a drop from June’s 12-month forecast of 98% but represents the lowest projected 12-month level of cover since the Regulator started collecting cash flow data.
Notwithstanding ‘golden rules’ and ‘stress-testing’, all social housing providers will need to keep a keen eye on their interest cover ratios from here on in and regularly review the extent to which they can comply with the same.
It is worth remembering that whilst most facility agreements will test interest cover annually (by reference to the most recent audited accounts), interest cover is often monitored by lenders on a quarterly basis. It is also worth noting that most lenders will require their borrowers to notify them of a Potential Event of Default (like a potential breach of an interest cover covenant) as soon as a borrower identifies that risk. With that in mind, social housing providers must engage with their funders as soon as a risk of interest cover breach is identified. Providers and funders can then explore potential ways to mitigate that risk, rework financial covenants and/or waive the breach entirely (as appropriate).
Monitoring economic risks, tracking financial covenants, stress testing and reporting are all going to be critical here as well as transparent discussions with funders if/as/when the need arises.
“It is evident that levels of interest cover have deteriorated and are set to reduce again over the next 12 months”