Free-standing derivatives allow associations to separate their interest arrangements from their loans. Associations can have a loan with one lender and take out a derivative with another to pay the interest on it.
The association may be able to negotiate more competitive rates on the derivative than they could if they negotiated their interest with the loan lender. They can also change lender more easily because the derivative separates the interest arrangements from the loan.
The trend for more frequent refinancing has made free-standing derivatives an increasingly popular option.
London & Quadrant plans to cover £240m of its loans by this method.
David Montague, London & Quadrant's group finance director, said: "Over the next couple of years, London & Quadrant is moving to a position where 40% of our £600m loan portfolio will be protected through the use of derivatives.
"We are moving away from a position where two-thirds of our portfolio was long-term fixed through either the capital markets or with the lenders. It's a big change for us."
Montague attributed the growing popularity of derivatives to active promotion by funders as well as greater financial flexibility.
London & Quadrant joins a growing band of associations taking out free-standing derivatives. Acton Housing Association and Orbit Housing Group are two of the most recent to use them.
Orbit Housing Group and its subsidiary Orbit Bexley have £50m of their portfolio covered by free-standing derivatives, saving them about £50,000 a year.
Claire Davis, the group's finance director, said: "I would imagine that we are getting more sophisticated in treasury management as a sector and are starting to see that with the loan structures that are coming through."
Banks HBOS and JC Rathbone Associates both said they were seeing more interest in free-standing derivatives from their customers.
Source
Housing Today
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