Affordable Homes Guarantee Scheme 2020 (AHGS20)

Concepts

• banking and investment
• new affordable housing
• new affordable homes
• scheme expansion
• affordable homes guarantee scheme
• more homes
• new-build and additional affordable housing
• 2020
• affordable
• homes

Location

LONDON

Description

The Department for Levelling Up, Housing and Communities (the "Department") entered into a concession arrangement with Saltaire Housing Limited (the "Concessionaire") on 16 October 2020. On 6 November 2019, the Department published a contract notice to appoint a concessionaire to deliver the Affordable Homes Guarantee Scheme ("AHGS20"). The contract notice explained that the concessionaire was required to raise £3bn of capital from investors (with a potential £3bn top up at the Department's sole discretion) and on-lend to registered housing providers ("RPs") and manage the resulting loan portfolio over the lifetime of the borrowings (which shall continue to be a maximum of 30 years from the date the relevant loan is advanced). The estimated total value of the concession contract was stated to be in the range of £80m-£125m. The purpose of the AHGS20 was to enable the Secretary of State for Housing, Communities and Local Government to provide guarantees covering scheduled interest and scheduled principal payable to investors by the capital-raising special purpose vehicle established by the successful tenderer and the corresponding loans made to RPs under the scheme. The scheme seeks to maximise the benefit of the guarantee, by reducing RPs' cost of borrowing, thereby enabling them to deliver more new affordable homes. Management of the concession agreement would be delegated to Homes England. At the time of award, the concession arrangement was restricted to the granting of loans in connection with the development of new affordable housing. However, due to recent macro-economic events as described below, the Department identified that the scheme required (i) expansion to broaden the range of delivery undertakings which may be eligible for funding, to include improvements relating to energy efficiency and housing decency as well as the construction of new-build and additional affordable housing; and (ii) clarify or in some cases modify the current rules of the scheme, to increase its accessibility to a broader range of RPs and confirming that particular types of transaction are permitted. The Department believes the modifications referred to in this notice were necessary due to the fact that the required delivery undertakings under each loan as originally designed no longer meets RP, or government, requirements due to financial and non-financial issues that have had a significant impact on the affordable housing sector since it was launched. The original scheme required all funding to be spent on new development, which has been deprioritised by many of RPs in favour of expenditure on decarbonisation and decency works to their existing stock. This reprioritisation occurred towards the end of 2022 in light of rising inflation, interest rate rises, capital expenditures, maintenance costs, potential rent caps, the urgent need to address decency standards and health and safety issues in respect of their existing social housing (e.g. discovery of mould/damp within social housing accommodation which have resulted in health issues, and ongoing fire safety concerns) and a desire to improve energy efficiency of housing (both for environmental and anti fuel-poverty reasons).

Ammendments to Previous Notice

Award Detail

CPV Codes

• 66100000 - Banking and investment services

Indicators

• Contract modified due to additional needs.

Legal Justification

Many RPs that would otherwise have been eligible for the scheme paused development activity and diverted their available funding towards existing stock improvements, which inevitably reduced demand for the existing scheme given its development focus. By allowing AHGS20 finance to be used both for new development (with a minimum of 50% of each loan to be used for this purpose) and decarbonisation and remediation, the scheme will be better aligned to RPs' current priorities, enabling them to access funding at lower rates than are available in the market (that can in turn be reinvested in delivering their business plans) and ensuring they can continue to develop new homes while addressing issues with their existing stock. Further, the political landscape has changed since the procurement was conducted in 2019/2020, such that there is a more intensive focus today in respect of tackling environmental and quality issues. The Department believes that the AHGS20 is the optimal vehicle to address these issues and the expansion of the required delivery undertakings under each loan and the limited range of associated variations to the benefit of RPs does not materially alter the services procured under the initial concession contract (i.e the raising of finance to lend to RPs and the subsequent underwriting and administration of that lending). Indeed, not only would the adjustment to the borrowing restrictions be optimal, but in respect of the health and safety issues referenced above, the Department believes it is entirely necessary for the AHGS20 to assist with this objective. Therefore, in order for the AHGS20 to continue to deliver its primary objective (i.e. support the delivery of new-build and additional affordable housing), it is necessary to ensure that the scheme facilitates safe practices and ensures that borrowers meet their contractual obligations and wider duties to comply with latest government guidance/regulations. Changes to the security arrangements (whereby borrowers will have the option to calculate the minimum value of their security by reference to the amount allocated to new development only) were required because, unlike new development, expenditure on decarbonisation and decency works does not necessarily lead to a corresponding increase in asset values. Requiring borrowers to provide security in the absence of such an increase would create a drag on their unencumbered asset base, prejudicing their ability to access finance from commercial lenders who require a more traditional security package. These factors, coupled with the other factors discussed below, means that the Department believes it is necessary to incorporate these modifications. The Department also believes that a change of concessionaire could not be made for economic/technical reasons. Tranche A and Tranche B constitutes an integrated product, in that both are advanced to the same borrower at the same time and are secured by the same asset pool. If Tranche A/Tranche B were advanced by different lenders, and the Tranche B lender were unsecured, then in the event of a default on the Tranche B loan resulting in a call on the guarantee, the Department would have no recourse to the Tranche A security in relation to the Tranche B default. The Department cannot accept such a diminished security position. It would also involve operational complexity for all parties and would also result in the loss of efficiencies associated with utilising the existing bond programme to finance the Tranche B lending, leading to increased costs. A change of concessionaire would also cause significant inconvenience and substantial duplication of costs for the Department. The 2019/2020 procurement process took some 18 months to ensure that bidders were provided with sufficient time to respond. Delaying the implementation of the above changes would have had a significant impact on RPs' ability to access funding necessary to enable them to deliver their business plans to support the delivery of new-build and additional affordable housing, thereby jeopardising the objectives of the scheme. It would have also incurred costs and the administrative burden on applicants because of the need to make separate applications and put in place separate loan and security agreements with separate entities depending on whether the loan was for new development or investment in existing stock, with a high degree of overlap/duplication. It would also have also required separate due diligence and approval processes within the Department which would have extended the timeline for making loans available. To that end, the Department took the view that the timescales and costs which would be involved in a further procurement process, and to operate a parallel scheme, would be significant and would lead to substantial duplication of public funds. In respect of the increase in value to the original concession, the original contract value was estimated to be £105m (on the basis of the Cumulative Guarantee Amount being £3bn) and £192m (on the basis of the Cumulative Guarantee Amount being £6bn). The modifications described in this notice result in the Cumulative Guarantee Amount being £6bn and an increase to the estimated contract value to £213m in total, which is significantly below the 50% threshold.

Other Information

The Department published a voluntary ex-ante transparency notice ("VEAT") on 1 December 2023 with reference 2023/S 000-035560, outlining its intention to incorporate the modifications referred to within this modification notice. The Department entered into the amendments proposed after observing a 10 day period following publication of the VEAT notice.