In a typical insolvency process, the secured lender will have the whip hand and can exercise considerable discretion on the enforcement opportunities to pursue. However, Social Housing is not a typical insolvency environment, but a regulated one. Lenders play a crucial role in the sector but cannot act in isolation.
The sector is made up of a diverse group of stakeholders – government agencies such as Homes England and the Regulator of Social Housing, secured lenders, investors, registered providers of social housing (RPs) and of course, the residents themselves. There is no comparable lending environment and the balance, in times of distress, will be an unusual one.
The Housing and Planning Act 2016 created the Housing administration regime, as further explained in this newsletter. One change effected by this regime is to displace the lender's automatic right as a qualifying floating charge holder to appoint an Administrator, instead granting the Secretary of State the ability to seek its own appointment.
To date, no housing Administration has been appointed. However, this is not because the sector is immune to the risk of insolvency but it is largely down to the role of the Regulator in reviewing the regular and detailed financial reports from RPs. If issues do arise, they are not likely to come as a surprise and an early intervention will maximise the prospects of a solution being found without the need to trigger a formal insolvency process. Insolvencies in this sector have been limited in number, but when they have taken place they have to date been resolved by a restructuring or sale of assets before any formal insolvency process has been required.
However, the recent cost of living crisis, higher interest rates and the increasing number of sector related insolvencies, such as the ISG group, are plainly matters that nether RPs nor the Regulator can anticipate. Further, the scale of the larger Providers and the debt they carry has grown significantly in recent years. In circumstances where the government does not offer a guaranteed bail out for a struggling RP, it remains possible that a housing administrator may be appointed in the future.
If a housing administrator were to be appointed, one obvious potential issue that could arise relates to their statutory obligation to achieve the best return for creditors. A sale of housing stock into the private, or for profit, sector may well often achieve a better outcome for creditors than a sale within the sector. However, any loss to the social housing stock would create political and social issues for the other stakeholders. We explain this tension in a little more detail elsewhere in the newsletter.
If the secured bank debt can only be cleared from a sale to the private sector, then the housing administrator has no choice but to take this option. It would be then for the Secretary of State to consider whether it is both able and, critically, willing to intervene to prevent the loss of stock, bearing in mind the need to keep lenders engaged with the sector as a whole.
A further issue is that any lender pushing a RP into an insolvency process may suffer significant reputational damage. In 2007, in relation to one of the few insolvencies in this sector, it was necessary for one or more lender to take steps towards the formal insolvency of the RP in question in order to trigger the regulator's powers to propose a rescue. Despite the fact that this was a necessary step in order to protect the interests of the residents, lenders were anxious to avoid reputational fall out. Ultimately, several lenders served their notices of default simultaneously in order to dilute the potential reputational damage.
In that particular insolvency, that step was only taken once the lenders knew that there was a solution in place. There was no housing administration process available. Now that such a process is available, it could be used in a case where there is a potential solution available. However, the prospect of a protracted administration and the uncertainty it would create is unattractive for all interested parties. Therefore, it would likely be is critical to have a clear plan to exit from administration before any substantive steps are taken to appoint the housing administrator. Any such solution will almost always require another RP being prepared to acquire some or all of the assets of the distressed entity.
Conclusion
The fact that no housing administrator has yet been appointed reflects the general security of the sector, and the ability and the willingness of the various stakeholders to work together to identify mutually beneficial solutions and to act quickly. It also reflects the success of the regulatory regime, which provides the Regulator with visibility on the performance of RPs, allowing for early intervention.
Nevertheless, the sector is not immune and therefore, lenders will need to be proactive and engage with other stakeholders. None of them want to see a housing administrator in office: this is very much a regulatory tool of last resort.
