THIS NOTICE IS IMPORTANT AND REQUIRES THE IMMEDIATE ATTENTION OF NOTEHOLDERS. IF NOTEHOLDERS ARE IN ANY DOUBT AS TO THE ACTION THEY SHOULD TAKE, THEY SHOULD SEEK THEIR OWN FINANCIAL, LEGAL OR OTHER PROFESSIONAL ADVICE, INCLUDING AS TO ANY TAX CONSEQUENCES, IMMEDIATELY FROM THEIR STOCKBROKER, SOLICITOR, ACCOUNTANT OR OTHER INDEPENDENT FINANCIAL, LEGAL OR OTHER PROFESSIONAL ADVISER
NOTICE TO NOTEHOLDERS
To the holders of the £192,270,000 8.25 per cent. Secured Loan-Backed Notes due June 2027 ISIN: XS0073407537 and XS0222506395
(the"Notes")
issued by Housing Association Funding PLC
(the "Issuer")
Capitalised terms used but not otherwise defined herein shall have the meanings ascribed to them in the master schedule of definitions, interpretation and construction clauses dated 23 January 1997, as amended and restated on 30 January 1998 and as further amended and restated on 23 December 1999.
The Issuer has been informed by the Borrowers of the following information, which it has not independently verified.
Background
On various dates between 1997 and 2005, the Issuer issued the Notes, the proceeds of which were used to fund loans to 11 registered providers of social housing (RPs). The RPs are:
- Viridian Housing (formerly Servite Houses);
- Stonewater 2 Limited (formerly Jephson Homes Housing Association Limited);
- Arena Housing Group Limited (formerly Grosvenor Housing Association Limited);
- Home Group Limited (Home Housing Association Limited);
- Thames Valley Charitable Housing Association Limited;
- The Riverside Group Ltd (formerly Riverside Housing Association Limited);
- Derwent Housing Association Limited;
- Knightstone Housing Association Limited;
- A2Dominion South Limited (formerly Airways Housing Society Limited);
- Midland Heart Limited (formerly Touchstone Housing Association Limited and Touchstone 2 Housing Association Limited); and
- Paradigm Housing Group Limited (formerly Chiltern Hundred Housing Association Limited)
(each, a Borrower and together, the Borrowers).
The Issuer advanced loans, in varying amounts, to each of the Borrowers pursuant to the Loan Agreements.
The Borrowers' obligations under their respective Loan Agreements are secured by certain security interests granted by the relevant Borrower over certain properties and other assets of that Borrower in favour of the Issuer pursuant to the Legal Charges.
Welfare Reform and Work Act 2016 (the Act)
The UK Government has introduced new legislation pursuant to which rents chargeable by RPs on their social housing in England must reduce by 1% per annum for the next four years instead of increasing by CPI +1% per annum over the same period. This change was introduced on 1 April 2016 pursuant to Section 20 of the Act. The wording of Section 20 of the Act is as follows:
"In relation to each relevant year, registered providers of social housing must secure that the amount of rent payable in respect of that relevant year by a tenant of their social housing in England is at least 1% less than the amount of rent that was payable by the tenant in respect of the preceding 12 months"
This rent reduction will apply to tenants of properties which are currently charged as security by the Borrowers in favour of the Issuer pursuant to the Legal Charges (the Charged Properties).
Although the Act has now come into force, none of the Borrowers (other than Midland Heart Limited) have reduced their rents on any of the Charged Properties as a result or in anticipation of the implementation of the Act. Under the Act there was no requirement to reduce rents on 1 April 2016. The Borrowers (other than Midland Heart Limited) are intending to defer the required reduction until later in 2016 and then introduce a higher reduction in rent so that a 1% reduction across the year 1 April 2016- 31 March 2017 is achieved.
Midland Heart Limited has confirmed to the Issuer that it has reduced the rents of those of its Charged Properties affected by the implementation of the Act, where anniversary increases were due, by 1% per annum with effect from 1 April 2016.
The Material Events EoD
Each Loan Agreement contains a number of events of default, one of which is as follows:
"Material Events:
any other event occurs or circumstance arises affecting, or potentially affecting, the financial condition of the Borrower or the rental income from Charged Properties which, in the reasonable opinion of the Lender, could materially and adversely affect the ability of the Borrower to perform all or any of its obligations under or otherwise to comply with the terms of any of the Facility Documents or the ability of the Borrower, any successor in title to the Borrower or any Receiver or any Managing Agent to obtain (net of all relevant costs and expenses including, without limitation, in respect of maintenance, repair, remediation and management) rental income from a Charged Property at a rate at least equal to the most recently ascertained Net Rental Income attributable to such Property without incurring any liability for an Environmental Claim or an Environmental Matter." (the Material Events EoD)
The drafting of the Material Events EoD is arguably unclear and the Borrowers and the Issuer have taken their own separate legal advice.
The Borrowers (based on their legal advice received) consider that on their interpretation of the Material Events EoD, an Event of Default will not be triggered under any of the Loan Agreements as a result of the rent reduction imposed by the Act.
The Borrowers (based on their legal advice received) contend that the words "or the ability of the Borrower...to obtain....(net of all relevant costs and expenses including, without limitation, in respect of maintenance, repair, remediation and management) rental income from a Charged Property at a rate at least equal to the most recently ascertained Net Rental Income attributable to such Property without incurring any liability for an Environmental Claim or an Environmental Matter" should be interpreted to include as an Event of Default a circumstance in which a liability for an Environmental Claim or an Environmental Matter on a particular Charged Property has arisen, and not otherwise.
The Issuer (based on its legal advice received) considers that, following the language above, an Event of Default could be triggered, or might have been triggered, under the Loan Agreements as a result of the rent reduction due to be imposed by the Act, principally because, it could adversely impact upon the ability of the Borrowers to obtain "(net of all relevant costs and expenses including, without limitation, in respect of maintenance, repair, remediation and management) rental income from a Charged Property at a rate at least equal to the most recently ascertained Net Rental Income attributable to such Property".
The Issuer also considers that the words, "or the ability of the Borrower ...to obtain... ....(net of all relevant costs and expenses including, without limitation, in respect of maintenance, repair, remediation and management) rental income from a Charged Property at a rate at least equal to the most recently ascertained Net Rental Income attributable to such Property without incurring any liability for an Environmental Claim or an Environmental Matter", can be interpreted to include, as an Event of Default, circumstances which would prevent the Borrowers from being able to obtain rental income at least equal to the most recently ascertained Net Rental Income, whether or not this occurs as a result of liability for an Environmental Claim or an Environmental Matter on a particular Charged Property.
Notwithstanding the above, and the different views expressed by the Borrowers and Issuer, both advocate the sense in the current debate reaching a legally and commercially certain conclusion.
Overcollateralisation
Each Loan Agreement contains a debt service reserve covenant. As specified in the offering circular in respect of the Notes, under that covenant, if the Net Rental Income (as defined in each Loan Agreement) of a Borrower is determined by the Issuer to have fallen below certain specified levels, or if rents actually collected by a Borrower from its Properties during a specified period fall below a specified level, then that Borrower will be obliged to make a reserve loan payment into the relevant Reserve Account. This loan is made pending grant by that Borrower of additional security over one or more additional properties to make up the shortfall in Net Rental Income or, as the case may be, with the intention of ensuring that the shortfall in rent collected does not recur.
Each of the Borrowers has confirmed to the Issuer that the rent reduction referred to above will not trigger a requirement for it to make a reserve loan payment into its Reserve Account or the grant of additional security over additional properties as it will not breach the debt service reserve covenant referred to above.
Intention of two Borrowers to use Collateral Substitution
The Issuer has been informed that the Borrowers have been evaluating their options for some time. Two of the Borrowers, Midland Heart Limited and Paradigm Housing Group Limited, have confirmed to the Issuer they are also considering providing substitute collateral for their respective Loans in accordance with clause 25.1 of the Midland Heart Limited Loan Agreements and clause 26.1 of the Paradigm Housing Group Loan Agreement, respectively. Under these clauses, a Borrower may require the Issuer to accept Defeasance Instruments as security for obligations of the Borrower in place of any or all of the Charged Properties subject to the satisfaction of certain conditions. Upon satisfaction of those conditions, which include the relevant Borrowers providing legally effective first fixed encumbrances over the Defeasance Instruments, the Issuer shall release all the Charged Properties from the Legal Charges affecting them.
The Issuer has been informed that, as their Loans are over-collateralised, Midland Heart Limited and Paradigm Housing Group Limited want to exercise this option in order to release their Charged Properties and deploy them more effectively as security for other borrowings.
Midland Heart Limited and Paradigm Housing Group Limited have confirmed to the Issuer that they currently have loans outstanding of approximately £9,480,000 and £4,060,580 respectively under their respective Loan Agreements.
The Proposal - Proposed Amendment of the Loan Agreements:
The Borrowers and the Issuer are currently in discussions to resolve the difference of view as to the construction of the Material Events EoD.
In the absence of any alternative resolution of this matter, the Issuer might be required to make an application for directions from the English Court as to the construction of the Material Events EoD.
In order to resolve the identified uncertainty in relation to the interpretation of the Material Events EoD without making an application for directions from the English Courts (and thereby avoiding the associated costs and delays of doing so), the Borrowers are in the process of formulating a proposal to request from the Issuer its consent to amend the Transaction Documents (which include the Loan Agreements) to, amongst other things, clarify the Material Events EoD. The Issuer covenants in the Conditions not to consent to any amendments to the Transaction Documents without the prior written consent of the Trustee. The consent of the Trustee in the circumstances will be predicated on the proposed amendments to the Transaction Documents being sanctioned by the Noteholders pursuant to Extraordinary Resolutions of Noteholders in accordance with the Trust Deed.
Borrowers' Advisor and Special Committee of the Investment Association
The Issuer has been informed by the Borrowers that the Borrowers have appointed Centrus Advisors LLP ("Centrus") as its advisor in connection with the process of implementing any proposal to amend the Loan Agreement and/or the Transaction Documents in relation to the Material Events EoD.
The Issuer has been informed by the Borrowers that the Borrowers intend to approach the Investment Association (the "IA") with a request that the IA convenes a special committee in order to consider any proposed amendments to the Loan Agreement and/or the Transaction Documents and to indicate whether or not the members of the special committee of the IA find them acceptable. The Issuer will not participate in the special committee process and so Noteholders that would like to discuss the matter with the Borrowers can contact the Borrowers via their financial adviser, Centrus.
Queries may be addressed to the Borrowers as follows:
Centrus Advisors LLP
Address: 3rd Floor, Mermaid House | 2 Puddle Dock | London | EC4V 3DB
Attention:Robert St. John
Telephone: +44 20 3846 5676
Email: robert.stjohn@centrusadvisors.com
Please note that the Issuer does not take any responsibility for any information disclosed by the Borrowers and their respective representatives, advisers and agents (including Centrus) or whether this might constitute inside information in respect of the Issuer and/or the Notes. By contacting the Borrowers and their respective representatives, advisers and agents (including Centrus) Noteholders confirm they are aware that the information disclosed might constitute inside information and are aware of their legal responsibilities in that respect. There can be no assurance that any or all of the information communicated to Noteholders by the Borrowers or their respective representatives, advisers and agents (including Centrus) will be made public or that persons involved in such communications will not be restricted from trading Notes in which they have an interest.
The Trustee (or any of its advisors) has not been involved in the formulation of this notice and none of the Issuer, Centrus or the Trustee (or any of their respective advisers) has been involved in formulating proposed amendments to the Loan Agreements and/or the Transaction Documents or verified the information contained in any part of this notice. Further, none of the Issuer, the Borrowers, Centrus or the Trustee, (or any of their respective advisors) expresses any opinion as to the purpose or merits of the information contained in any part of this notice or as to the action Noteholders should take in relation to this notice. None of the Issuer, the Trustee or Centrus (nor any of their respective advisors) makes any representation regarding the accuracy, sufficiency, relevance, completeness or otherwise of any information contained in this notice or otherwise disclosed or to be disclosed to Noteholders in connection with this notice on any information herein.
Without prejudice to the foregoing (and without purporting to limit any person's liability for fraudulent misrepresentation), none of the Issuer, the Trustee or Centrus (or any of their respective advisors) accepts any responsibility or liability in relation to the information contained in any part of this notice, the matters set out in this notice, any other information (whether written or oral or otherwise) made available to any person receiving this Notice (including in relation to any communication or dealings with any of the Borrowers or any of their respective representatives, directors, officeholders, employees, advisers or agents) and any such liability is expressly disclaimed.
Please note that nothing in this notice is intended to amount to an invitation or inducement to engage in investment activity nor does it constitute or form part of, and should not be construed as, an offer for sale, exchange or subscription of, or a solicitation of any offer to buy, exchange or subscribe for, any securities of the Issuer or any other entity. The distribution of this notice may nonetheless be restricted by law in certain jurisdictions. Persons into whose possession this notice comes are required by the Issuer, the Trustee, Centrus and the Borrowers to inform themselves about, and to observe, any such restrictions. This Notice does not constitute a solicitation in any circumstances in which such solicitation is unlawful. None of the Issuer, the Trustee, Centrus or the Borrowers will incur any liability for its own failure or the failure of any other person or persons to comply with the provisions of any such restrictions.
This Notice is made without prejudice to any and all of the Issuer's and the Trustee's rights under the Conditions and the Transaction Documents, all of which are expressly reserved.
Queries may also be addressed to the Issuer as follows:
Housing Association Funding PLC:
Address: 4th Floor, 40 Dukes Place, London EC3A 7NH
Attention: The Directors
Telephone: + 44 203 367 8200
Email: spvservices@capitafiduciary.co.uk
HOUSING ASSOCIATION FUNDING PLC
27 April 2016
