Learning from Regulatory downgrade

Page 1

Homes and Communities Agency

Maple House, 149 Tottenham Court Road, London, W1T 7BN

0300 1234 500

homesandcommunities.co.uk

2 May 2014

Dear Mr Betts,

Financial Viability Ratings

Thank you for your letter of 22 April concerning the Regulator’s financial viability

ratings, and specifically the Regulatory Judgement we recently published on

Johnnie Johnson Housing Trust (JJHT).

The downgrade of JJHT was published on 13 February. Prior to that, and as

soon as we had concluded that there was a significant risk that JJHT would be

issued with a non-compliant judgement, the provider had been put on our

“Gradings under review” list (initially in December reflecting our concerns over

governance, and then in January given subsequent concerns over viability). We

then concluded that JJHT was not compliant with either standard, and this was

reflected in the February judgement.

Our initial concerns about JJHT were a result of cost overruns and late delivery

of a large development scheme, a telephony fraud, the provider’s failure to

comply with its adopted code of governance, and its late submission of accounts.

We concluded that the provider was not managing risk effectively, that there

were weaknesses in internal controls, and that as such the provider did not

comply with the governance standard.

We had concerns about JJHT’s liquidity position prior to investigating the issues

outlined above, and had raised these concerns with the provider. Problems with

the development programme (which meant that cash was being used more

quickly than previously envisaged), weaknesses in the control environment, and

the late submission of accounts (which could have resulted in a breach of loan

covenants) compounded these concerns, and meant the assurances previously

given by the provider were no longer persuasive. Therefore in late January we

concluded that the provider had also failed to meet the viability standard.

Julian Ashby

Julian.ashby@hca.gsi.gov.uk

020 7393 2169

Clive Betts MP

House of Commons

London

SW1P 3JA

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The publication of non-compliant judgements would not of itself typically lead

automatically to a breach of loan covenants. However, we are aware that loan

agreements often include clauses which mean that the use of the Regulator’s

intervention powers (which are only available if and when a provider breaches

the Regulator’s standards) triggers a loan default, which in turn may trigger

default across a provider’s debt portfolio (owing to “cross default” clauses). In

this case we did not use our intervention powers because we were able to agree

an appropriate Voluntary Undertaking with the provider. No lender has called a

default in this case.

Inevitably, however, the publication of a non-compliant judgement does affect

the view of creditors and potential creditors. In this case, prior to the judgement

the provider was seeking to secure bond finance. Following the judgement, the

provider decided to pursue alternative sources of funding to secure its position in

the short to medium term, and has now stabilised the position while it reviews

longer term options. The fact that non-compliant judgements can have a

negative effect on the provider does not in any way prevent or delay publication

of such judgements. It does, however, mean that we look to the provider to

provide us with assurance that it can and will manage these effects.

We will always publish what we consider to be an accurate judgement based on

the facts available. In this case the facts available when the TSA published its

judgement in February 2011 did not give cause for concern. When the facts

changed, we responded quickly. Our experience is that when specific problems

do occur – for example, in this case in terms of development – they can be

symptoms of wider weaknesses, and we seek appropriate assurance.

Sometimes this process gives rise to further concerns, as it did in this case. This

risk-based approach to Regulation helps us make the most of resources we

have available to us, and is in line with our statutory objectives and duties,

including duties to act proportionately and minimise interference.

In the hearing, I referred to a ‘handful’ of cases where there were concerns over

potential non-compliance with the viability standard. As outlined in previous

letters, where we can, we try to intervene before a provider gets to a position

where it is non-compliant, particularly with the viability standard. As things

stand, there is no other provider which has breached the viability standard. If

and when a provider gets itself into this position, we will act quickly, decisively

and transparently, as we have done with JJHT.

Yours sincerely

Julian Ashby

Chair of the HCA Regulation Committee


Group Loans
 The Housing T.H.F.C. T.H.F.C. T.H.F.C. T.H.F.C. T.H.F.C. 
 Finance (Indexed) (Indexed 2) (First Variable) (Social Housing (Capital) UK Rents Total 
 Corp Limited Limited Limited Limited Finance) Limited PLC (No.1) PLC Loan 
Association borrower Loans Loans Loans Loans Loans Loans Loans Value 
(legal entity) Area £000 £000 £000 £000 £000 £000 £000 £000
A2Dominion London Limited South East 25,098 - - - - - - 25,098
A2Dominion North Limited South East 5,000 - - - - - - 5,000
A2Dominion South Limited South East 2,500 - 2,395 - - - - 4,895
Accent Foundation Limited National - 12,260 - - - - - 12,260
Accent Nene Housing Society Limited East Anglia 1,832 - - - - - - 1,832
Adactus Housing Association Limited North West - - - - 1,935 - - 1,935
Agudas Israel Housing Association Limited London 202 - 599 - - - - 801
Aldwyck Housing Association Limited South East 1,065 - - - - - - 1,065
AmicusHorizon Group Limited London 28,500 15,075 - - - - - 43,575
Asra Greater London Housing Association Limited London 3,000 - - 4,115 - - - 7,115
Axiom Housing Association Limited East Anglia 21,795 - - - - - - 21,795
Beth Johnson Housing Association Limited Midlands 4,000 - - - - - - 4,000
Cambridge Housing Society Limited East Anglia 4,200 - - - - - - 4,200
Catalyst Communities Housing Association Limited London 4,290 1,350 - - - - - 5,640
Cardiff Community Housing Association Limited Wales - 291 - - - - - 291
Cheviot Housing Association Limited North East - - - - 3,000 - - 3,000
Clwyd Alyn Housing Association Limited Wales 2,000 2,598 - - - - - 4,598
Cymdeithas Tai Clwyd Wales 1,500 - - - - - - 1,500
Community Housing Association Limited London 43,738 - - - - - - 43,738
Connect Housing Association Limited North East - - - - 5,000 - - 5,000
Contour Homes Limited North West 2,500 - - - 8,237 - - 10,737
Cotman Housing Association Limited East Anglia 1,500 - - - - - - 1,500
Cymdeithas Tai Eryri Limited Wales 2,500 - - - - - - 2,500
Devon & Cornwall Housing Association Limited South West 2,549 5,576 - - - - - 8,125
De Montfort Housing Society Limited Midlands 5,550 - - - - - - 5,550
East Homes Limited London 1,403 - - - - - - 1,403
Eildon Housing Association Limited Scotland - - - - 3,900 - - 3,900
English Churches Housing Group Limited National 19,823 727 - - - - - 20,550
Equity Housing Group Limited North West 8,251 364 - 2,676 - - - 11,291
Estuary Housing Association Limited East Anglia 7,729 676 - - - - - 8,405
Family Mosaic Housing London 43,534 1,766 - - - - - 45,300
Friendship Care Housing Association Limited Midlands 2,000 - - - 5,500 - - 7,500
Gateway London 1,250 - - - 7,001 - - 8,251
Grampian Housing Association Limited Scotland - - - - 3,225 - - 3,225
Gravesend Churches Housing Association Limited South East - - - - 1,750 - - 1,750
Heantun Housing Association Limited Midlands 10,000 - - - - - - 10,000
Hexagon Housing Association Limited London 1,500 260 4,190 - - - - 5,950
Hightown Praetorian and Churches Housing Association Limited South East 1,100 1,039 - - - - - 2,139
Home Group Limited National 2,549 10,327 11,672 - - - - 24,548
Hyde Housing Association Limited South East - - 11,586 - - - - 11,586
Innisfree Housing Association Limited London 3,000 - - - - - - 3,000
Irwell valley Housing Association Limited North West - - 2,394 - - - - 2,394
Islington & Shoreditch Housing Association Limited London 2,000 - - - 4,007 - - 6,007
Johnnie Johnson Housing Trust Limited North West 18,500 727 - - - - - 19,227
Knightstone Housing Association Limited South West 8,918 11,166 - - - - - 20,084
Kush Housing Association Limited London 4,000 - - - - - - 4,000
Leeds Federated Housing Association Limited North East 3,000 - - - - - - 3,000
Leeds & Yorkshire Housing Association Limited North East 2,000 - - - - - - 2,000
Leicester Housing Association Ltd Midlands - - - - 4,598 - - 4,598
Livability Housing National - - - - 3,000 - - 3,000
Liverpool Housing Trust Limited North West 7,000 - - - 5,970 - - 12,970
London & Quadrant Housing Trust London 31,496 1,039 - - - - - 32,535
Longhurst Homes Limited East Anglia 9,400 - - - - - - 9,400
Manchester Methodist Housing Association Limited North West 5,531 - 599 618 - - - 6,748
Manningham Housing Association Limited North East 15,360 - - 864 2,000 - - 18,224
Mercian Housing Association Limited Midlands 2,244 - - - - - - 2,244
Metropolitan Housing Trust Limited London 5,300 - 1,796 - - - - 7,096
Mid Wales Housing Association Limited Wales - - 1,317 - - - - 1,317
Midland Heart Limited Midlands 24,633 9,423 - - - - - 34,056
Minster General Housing Association Limited East Anglia 5,435 - - - 1,500 - - 6,935
Moat Homes Limited South East 3,500 6,514 - - - - - 10,014
Moseley & District Churches Housing Association Limited Midlands 3,050 - 2,896 - - - - 5,946
Mosscare Housing Limited North West 33,247 - - - - - - 33,247
Newlon Housing Trust London 5,046 - - - - - - 5,046
NomadE5 Housing Association Limited North East - - - - 5,500 - - 5,500
North London Muslim Housing Association Limited London 1,000 - - - 1,500 - - 2,500
North Wales Housing Association Limited Wales 2,500 416 - - 5,000 - - 7,916
Nottingham Community Housing Association Limited Midlands 17,633 - - - - - - 17,633
Octavia Housing and Care London 2,000 - - - 3,500 - - 5,500
Oxford Citizens Housing Association Limited South East - - - 617 - - - 617
Paddington Churches Housing Association London 2,500 - - - 2,000 - - 4,500
Pembrokeshire Housing Association Limited Wales 1,000 - - - - - - 1,000
Penwith Housing Association Limited South West 5,418 - - - - - - 5,418
Places for People Homes Limited National 26,451 - - - - - - 26,451
Portal Housing Association Limited South West 11,000 - - - - - - 11,000
Sadeh Lok Housing Group Limited North East 650 - - - - - - 650
Loans Portfolio as at 31st March 2009
Fixed Charge Security13
Group Loans continued
 The Housing T.H.F.C. T.H.F.C. T.H.F.C. T.H.F.C. T.H.F.C. 
 Finance (Indexed) (Indexed 2) (First Variable) (Social Housing (Capital) UK Rents Total 
 Corp Limited Limited Limited Limited Finance) Limited PLC (No.1) PLC Loan 
Association borrower Loans Loans Loans Loans Loans Loans Loans Value 
(legal entity) Area £000 £000 £000 £000 £000 £000 £000 £000
Sanctuary Housing Association Limited National 13,481 - - - - - - 13,481
Shaftesbury Housing Association Limited National - 1,871 - - - - - 1,871
Soho Housing Association Limited London - - - - 1,500 - - 1,500
South Yorkshire Housing Association Limited North East 4,676 - - - - - - 4,676
Southern Housing Group Limited London 33,599 3,055 - - 10,000 - - 46,654
Spirita Limited Midlands 2,490 - - - - - - 2,490
Springboard Housing Association Limited London 6,000 - - - - - - 6,000
Stadium Housing Association Limited London 43,510 - - - - - - 43,510
Staffordshire Housing Association Limited Midlands - - - - 5,300 - - 5,300
St Pancras & Humanist Housing Limited South East 5,600 - - - - - - 5,600
St vincent’s Housing Association Limited North West 3,050 - - - 4,000 - - 7,050
Sutton Housing Society Limited South East 250 - - - - - - 250
Swaythling Housing Society Limited South West 22,500 - - - - - - 22,500
Taff Housing Association Limited Wales 500 - - - 1,000 - - 1,500
Thames valley Charitable Housing Association Limited South East 14,915 - - - - - - 14,915
Three Rivers Housing Association Limited North East 3,000 - - - 1,541 - - 4,541
Toynbee Housing Association Limited London 1,100 - - - - - - 1,100
Trident Housing Association Limited Midlands 5,000 2,805 - - - - - 7,805
United Welsh Housing Association Limited Wales 4,500 - - - - - - 4,500
venture Housing Association Limited North West - - - - 3,250 - - 3,250
Wales and West Housing Association Limited Wales 9,000 - - - - - - 9,000
Wandle Housing Association Limited London 21,418 - - - - - - 21,418
Waterloo Housing Association Limited Midlands 6,000 - - - - - - 6,000
Westcountry Housing Association Limited South West 37,000 - - - - - - 37,000
West Mercia Homes Limited Midlands 12,500 - - - - - - 12,500
West Pennine Housing Association Limited North West 3,000 - 3,476 - 2,000 - - 8,476
William Sutton Housing Association Limited National - - 2,394 - - - - 2,394
Wiltshire Rural Housing Association Limited South West 1,050 - - - - - - 1,050
Wirral Methodist Housing Association Limited North West 1,200 - - - - - - 1,200
Womens Pioneer Housing Limited London 1,000 - - - - - - 1,000
Wycombe Friendship Housing Association Limited South East 618 - - - - - - 618
Yorkshire Housing Limited North East 40,500 - - - - - - 40,500
Total Fixed Charge Security 822,727 89,325 45,314 8,890 106,714 - - 1,072,970
 The Housing T.H.F.C. T.H.F.C. T.H.F.C. T.H.F.C. T.H.F.C. 
 Finance (Indexed) (Indexed 2) (First Variable) (Social Housing (Capital) UK Rents Total 
 Corp Limited Limited Limited Limited Finance) Limited PLC (No.1) PLC Loan 
Association borrower Loans Loans Loans Loans Loans Loans Loans Value 
(legal entity) Area £000 £000 £000 £000 £000 £000 £000 £000
Adactus Housing Association Limited North West 5,500 - - - - - - 5,500
Aldwyck Housing Association Limited South East 1,699 1,350 5,986 - - - - 9,035
Arena Housing Group Limited North West 5,000 - 8,380 - 6,000 - - 19,380
Asra Greater London Housing Association Limited London 7,000 - - - - - - 7,000
Barnsbury Housing Association Limited London - - - 1,029 - - - 1,029
Black Country Group Limited Midlands 7,000 - - - - - - 7,000
Bromford Carinthia Housing Association South West 4,500 - 1,796 - - - - 6,296
Cheviot Housing Association Limited North East 12,607 1,974 - - - - - 14,581
Connect Housing North East 2,750 - - - - - - 2,750
De Montfort Housing Society Limited Midlands 6,250 727 - - - - - 6,977
East Midlands Housing Association Limited Midlands 19,120 - 1,377 1,647 - - - 22,144
Family Housing Association (Birmingham) Limited Midlands 6,000 - - - 3,796 - - 9,796
Habinteg Housing Association Limited National 6,048 - - - - - - 6,048
Islington & Shoreditch Housing Association Limited London 1,059 - - - - - - 1,059
Leicester Housing Association Ltd Midlands 22,769 727 - 1,152 - - - 24,648
Manningham Housing Association Limited North East 12,500 - - - - - - 12,500
Mercian Housing Association Limited Midlands 9,489 1,039 - - - - - 10,528
Metropolitan Housing Trust Limited London 29,351 2,390 - - - - - 31,741
Midland Heart Limited Midlands 23,939 - - - - - - 23,939
Moseley & District Churches Housing Association Limited Midlands - - - 1,647 - - - 1,647
Oxford Citizens Housing Association Limited South East 1,500 - - 617 - - - 2,117
Portsmouth Housing Association Limited South East 7,178 - - - - - - 7,178
Staffordshire Housing Association Limited Midlands 3,800 - - - - - - 3,800
Tuntum Housing Association Limited Midlands 7,000 - - - - - - 7,000
Three Rivers Housing Association Limited North East 3,000 - - - - - - 3,000
Total Floating Charge Security 205,059 8,207 17,539 6,092 9,796 - - 246,693
Fixed Charge Security continued
Floating Charge Security14
 The Housing T.H.F.C. T.H.F.C. T.H.F.C. T.H.F.C. T.H.F.C.
 Finance (Indexed) (Indexed 2) (First Variable) (Social Housing (Capital) UK Rents Total 
 Corp Limited Limited Limited Limited Finance) Limited PLC (No.1) PLC Loan 
Association borrower Loans Loans Loans Loans Loans Loans Loans Value 
(legal entity) Area £000 £000 £000 £000 £000 £000 £000 £000
A2Dominion London Limited London - - - - - - 4,659 4,659
Cheviot Housing Association Limited North East - - - - - - 6,921 6,921
London & Quadrant Housing Trust London - - - - - - 7,184 7,184
Mercian Housing Association Limited Midlands - - - - - - 5,228 5,228
Portico Housing Association Limited North West - - - - - - 5,172 5,172
Portsmouth Housing Association Limited South East - - - - - - 5,169 5,169
Income Cover - - - - - - 34,333 34,333
Gentoo Group Limited North East - - - - - 531,500 - 531,500
Total - - - - - 531,500 - 531,500

Grand Total 1,027,786 97,532 62,853 14,982 116,510 531,500 34,333 1,885,496


Premium 31 March 2009 12,387


Total at 31 March 2009 1,027,786 97,532 62,853 14,982 116,510 531,500 34,333 1,897,883

Penny Gilyard, Sadeh Lok’s Corporate Resources Director, said: “Through sound HR management processes and organisational development interventions, we have been able to significantly change the culture and drive performance within the business, which shows the value that HR can bring in leading business transformation.”

Paul Dolan, Sadeh Lok’s Chief Executive, said: “The Investors in People Gold Award is an amazing achievement for everyone associated with our business.

“We have now become members of a very exclusive club as nationally, only 3.5 per cent of businesses hold the gold level, with only a handful being housing associations.

“The Gold standard is about excellence in people and culture, the two key ingredients for any successful business. I am lucky to have such a fantastic employee team determined to provide excellence across our business.

“This year will see Sadeh Lok celebrate 25 years as a housing association and there is no doubt this recognition is the most significant success story in those 25 years.

“We will continue to provide innovative solutions for our residents and communities in response to the tough economic environment; nothing will distract us from that.”