Charging to a security trust deed: specific or numerical apportionment?
Housing associations are increasingly active in the capital markets as a means of raising finance for their development programmes. Debt issuance can have significant implications for effectively structuring property security.
When housing associations issue debt on the capital markets, properties are charged to a security trust and allocated to the beneficiaries.
Specific apportionment (SA) allocates specific properties for the benefit of specified beneficiaries. Properties can be charged to the security trust on an unallocated basis and then allocated at the time of issue. This is the traditional mechanism for conventional bond issues.
Numerical apportionment (NA) allocates a percentage of the total pool to each beneficiary; there is no specific list of properties held by any particular beneficiary. NA is gaining traction for capital market transactions, particularly for Medium Term Note Programmes (MTNs).
A growing trend?
In 2019, LiveWest and Clarion Housing Group issued MTNs underpinned by numerically apportioned security. NA facilitates quick access to markets and is particularly aligned with MTNs. The speed of issuance is an advantage for pricing and flexible financing, justifying the expense of setting up and managing a new trust. Due diligence obstacles are minimised if a new security trust is established with a ring-fenced numerically apportioned pool with minimal fluctuations, save for sales. If the time/costs allowance for a due diligence process and the need to reissue a prospectus on each issue can be dispensed with, this is attractive. If the pool is supplemented regularly, funder consents may not be required for substitution or withdrawal where this does not impact on the number and value of units. But compliance with reporting requirements is essential.
Once security is numerically apportioned, substitution between facilities is costly and if consents are required for substitution or release, they may be required from all beneficiaries. For early numerical pool issues, due diligence may be minimal but certifications do become outdated. Security is also required to supplement the pool to cover sales off; additional due diligence may mean delays. Adding new security to an existing numerical pool may require due diligence for both the new security and existing properties may require assessment by all participants.
Valuation reports may be required for all properties in the pool as properties are not held specifically. For SA, valuation is required only in respect of specifically apportioned properties. Bonds and MTN programmes are subject to regular valuation requirements, which is partly what makes it possible to issue quickly. Both NA and SA can achieve this, provided due diligence and valuation criteria are met.
Balancing the advantages of NA against the costs of running two security trusts and the property security and valuation challenges is crucial. A viable solution may to restructure a security trust deed with SA as the principal mechanism but allowing flexibility for NA. During market uncertainty, being able to benefit from both options is an advantage.
As always, having clean property security ready to charge at maximum value is critical to success.