Law Debenture plc: The digital distribution a working guide in social housing
Digital distribution, a working guide in social housing
In recent years, a digital security breakdown has become increasingly popular as a means of securing bond issues financing social housing, where there are a large number of individual properties charged and a regular release of security. While numerical allocation is more common in EMTN programs and stand-alone capital market shows, most traditional loans tend to rely on a specific allocation of ownership. As a result, there remains a general lack of awareness of how digital security allocation works in practice.
The Law Debenture Trust Corporation plc is a trust company with extensive experience in capital markets, and more specifically in lending to social housing clients with a large number of units billed, and we are very familiar with the practical workings of digital dispatch. . Our team has been involved in security trust structures that allow both specific and digital allocations since their inception in 2001. The first instance followed the Sunderland Council Stock’s transfer of some 36,000 units to a new housing association (now Gentoo). With a large-scale demolition program and regular disposals, anticipated necessity became the mother of invention and digital dispatch was born.
Associations will already be aware of the possibility of billing and assigning specific assets in a security trust structure that simplifies the process of reassigning security to new lenders. As part of the security trust structure, additional unallocated units may also be billed for prompt allocation to lenders. However, while the allocation is easier, the lenders still have to agree and do due diligence on this new title, which obviously still takes time. Assigning assets on a numerical dispatch basis (NAB) circumvents this and relies on charging sufficient assets to the security custodian to cover specific lending needs (and indeed other security requirements such as margin calls on stand-alone derivatives), but with a surplus to allow for ongoing rejections. NAB units form a global security pool from which allocations can be made digitally rather than directly / specifically to a lender or bond facility. In other words, rather than taking collateral directly on 10 Acacia Ave, etc., the lender has collateral on any proportion of the total pool that provides it with the necessary level of asset coverage. So, when creating the loan, the required asset coverage is calculated based on the average value of the numerically distributed units, and the required number of units in the pot is allocated in order to meet the coverage ratios of assets required by the lender. This allocation takes the form of an unspecified number of units rather than a specific list or even the actual percentage. As properties are sold, transferred, or removed from the global digital pool, the pool decreases but the actual number of allocated units does not change as long as there are excess units billed.
From a lender’s perspective, if there are excess units, the effect on the security of such releases will be very small compared to the release of a specifically billed good for which replacement collateral should be charged. . As a result, each release is accepted by the trustee based on the borrower’s certification that the asset coverage tests remain satisfied and, in the case of statutory assignments, this is often only covered in a quarterly review. The Quarterly Review reassesses the average value of the remaining units after a reconciliation with the Security Trustee by the Borrower, either directly or through Asset Core, after which it requests the Security Trustee to make an allocation adjustment numeric if the mean value has changed. The standard revaluation provision also gives rise to periodic reviews of NAB allocations and adjustments made to them.
The NAB works best when there are enough surplus units to allow for expected releases, otherwise a borrower will soon have to review the allocation and undertake releases or substitutions. It should be remembered that while for bond issues the trustee may review new securities, this is an expensive proposition if pricing exercises are carried out ad hoc. Also, if there are multiple lenders with NAB units, each should be satisfied with due diligence and each should be involved in billing for additional inventory. If you have multiple parties sharing the digital pot, a realistic surplus is key.
Digital security trust deeds allow lenders to switch from NAB to a specific allocation basis, but that obviously should be accepted by all lenders involved. If an execution were to take place, a specific allotment of ownership would be decided by independent review by an appraiser awarding what he would determine to be a fair cross section of the pot.
In summary, NAB is useful for portfolios of assets used as collateral that are subject to regular changes. As long as the excess units can be charged, releases are effectively taken from this excess without significant impact on the expected coverage of loan assets, thus eliminating the need for reassessment by lenders each time. The use of NAB has been relatively limited to date and some bank lenders still have a preference for the traditional specific allocation of loan collateral. However, the NAB presents a clean, efficient and logical basis on which housing associations can manage their loan guarantees – indeed, if the sector started with a blank sheet of paper, the NAB might just be a more obvious structure. As it stands, housing associations are using the establishment of EMTN programs to start moving to a NAB base and may choose to move their security arrangements further on that base as existing banking facilities are gradually built up. reimbursed.
LawDeb has a team of experts with significant experience in NAB in the social housing sector. For more information, please do not hesitate to contact the Associate Director, Nigel Letheren or one of the members of the Corporate Trust team.
The Law Debenture Corporation plc published this content on November 29, 2021 and is solely responsible for the information it contains. Distributed by Public, unedited and unmodified, on November 29, 2021 11:30:07 AM UTC.