On the money

The pressure on housing associations to ensure the consistent delivery of high-quality services with the utmost efficiency has led to mergers that form larger groups. These new groups are intended to create economies of scale by freeing cash currently used on administration to spend on tenants.

A key issue for registered social landlords contemplating a merger is the compatibility of their financial profiles. Lenders in the sector advance funds to different RSLs on significantly different terms depending on their track record, size and future plans. Certain RSLs will bargain for particular terms to be deleted from their loan agreements. One RSL might feel that allowing the lender to visit their premises at short notice is wholly unacceptable, while another may be quite indifferent to the point. RSLs have completely different bargaining power in the marketplace and this can lead to real problems if they merge without considering the compatibility of their financial and corporate positions.

A feature of many loans to existing group RSLs is that the borrower may have given the lender covenants that grant control over members of the group. The definition of group generally includes future as well as present group members and will include all parent and subsidiary companies and not just the other RSLs within the group. This poses particular problems where the RSL group includes a diverse range of companies, each with its own financing requirements.

Any financial covenants that look at the whole group will need to be renegotiated in case they cause problems for the new group. The ability to donate funds may be restricted to a particular amount in aggregate across the group. A change of key personnel in any company within the group may need permission from the lender. The agreements that govern intra-group arrangements may need to be approved by the lender and they may have to consent to any deviation from the existing business plan and cash flow forecasts for each company within the group.

A common covenant states that if one RSL in a group goes into default, all other RSLs in the group are also considered to be in default.

A change of key personnel in any company within the group may need permission from the lender

The usual practices of one company within the group may bring them under default under one of the loans to another company in the same group. Once this happens the cross-default covenant will be activated in each and every loan across the group.

This means all companies in a new group might go into default at the moment of the merger. It is vital that RSLs contemplating a merger carry out comprehensive due diligence against the loan portfolio of every company forming part of the proposed group as they may well be caught by these group covenants.

Another area that should be examined is whether or not the lender has the right to ask for group covenants if the RSL acquires or becomes a subsidiary. The lender may need to give its written consent to any merger.

A final point to note is that the results of the due diligence may reveal a need for refinancing. Historic loans may contain terms that are out of scope of current market practice, including high interest rates or margins that would never be accepted today. The new group RSL may be able to borrow on more favourable terms. It could show a large cost benefit to the new group RSL if they refinance. Comprehensive due diligence will reveal where this would be most beneficial.