BUSINESS CASE FOR THE SIMPLIFICATION OF
THE GROUP STRUCTURE
1
Table of Contents
1.
EXECUTIVE SUMMARY .................................................................................................................... 3
2.
INTRODUCTION ................................................................................................................................ 5
3.
STRATEGIC RATIONALE .................................................................................................................. 6
3.1.
Benefits Overview ........................................................................................................................... 6
3.2.
Protecting Customer Services ........................................................................................................ 6
3.3.
Local Representation ...................................................................................................................... 7
4.
STRUCTURE ...................................................................................................................................... 8
4.1.
Current Structure ............................................................................................................................ 8
4.2.
Proposed Structure ......................................................................................................................... 8
4.3.
Consolidation of the RPs within the Group ..................................................................................... 9
4.4.
Rationalising the commercial subsidiaries:..................................................................................... 9
5.
FINANCIAL OUTPUTS ..................................................................................................................... 12
5.1.
Business Case for Consolidation - Financial ................................................................................ 12
5.2.
Financial Covenants after Consolidation ...................................................................................... 13
5.3.
Financial Capacity after Consolidation ......................................................................................... 14
5.4.
Stress Testing ............................................................................................................................... 16
6.
RISK MITIGATION ........................................................................................................................... 17
7.
GOVERNANCE ................................................................................................................................ 18
8.
REGULATORY COMPLIANCE ........................................................................................................ 19
9.
TIMETABLE ...................................................................................................................................... 20
10.
CONSENTS .................................................................................................................................. 21
10.1.
Tenants: .................................................................................................................................... 21
10.2.
Staff: .......................................................................................................................................... 21
10.3.
The HCA:................................................................................................................................... 21
10.4.
The Charity Commission:.......................................................................................................... 21
10.5.
Existing funders to the Group: .................................................................................................. 22
10.6.
Other stakeholders, such as Local Authorities, partners, contractors etc: ............................... 22
10.7.
Pensions.................................................................................................................................... 22
2
1.
EXECUTIVE SUMMARY
1.1.
This business case is being developed during a period of significant change in the
housing sector. Changing demographics and a shortage of supply mean that there
continues to be un-met housing demand in the North East. Despite record low
interest rates, economic activity is still slowly recovering from the 2008 economic
crisis. Political change from the 2015 general election and the 2016 referendum
has created uncertainty and upheaval to housing providers across the UK. This has
been amplified by changes to regulation by the Homes and Communities Agency
(HCA), stricter performance monitoring and a focus on efficiencies.
1.2.
Having previously agreed on a 10 year rent settlement; the July 2015 Budget
announcement to reduce social housing rents over a four year period, and the
introduction of voluntary right to buy, has prompted a shocking wake up call to the
housing sector. Merger is now actively encouraged. The combination of the new
rent regime resulting in significantly less resources for social housing, and a political
focus that has switched to owner occupation and private sector solutions, has
encouraged housing providers to look for ways to adapt to the new environment.
1.3.
With over 33,600 homes under management, the Thirteen Group is one of the
largest Registered Providers (RPs) in the North East and has the potential to make
a significant contribution to meeting Government housing targets. The 2015
summer budget has encouraged the Group to think strategically in order to offset
the £55m of lost rental income in its financial plan.
1.4.
The Group has already submitted plans to the HCA to mitigate the lost income. It
recognises that even more needs to be done and a key driver of the proposed
simplification is to achieve even greater efficiencies, which fits with the requirements
of the HCA’s Value for Money Standard. The Group has developed challenging
targets for growth, whilst at the same time saving costs and continuously seeking
benefits for tenants and other stakeholders. Proactive solutions are required, in
particular, to deliver maximum benefits to Thirteen Group’s tenants and
stakeholders.
1.5.
The existing structure, the product of the 2014 merger of the Fabrick and Vela
Groups, has already delivered significant improvements and lower costs. The
Group recognises that it can do more to fulfil the original promises of the 2014
merger. The historic LSVT covenants and requirements for financial plan consent
within funding agreements and other restraints on resources in the ‘wrong’ part of
the Group are examples of factors that contribute to less than optimum efficiency.
The Group sees the need to combine its resources to release the maximum capacity
for selective investment in new housing supply, business opportunities, joint
ventures etc.
1.6.
Simplification of the Group structure would overcome the issue where assets sit in
one part of the Group but are needed in another. The several bullet repayment
loans falling due in 2019 provide an early opportunity after simplification to
restructure the loan book to save future funding costs, increase capacity and release
the current constraints on investment.
1.7.
The Group is delivering the financial savings required as a result of the changes to
the rent regime, and has identified tangible measurable benefits from consolidating
the Group.
3
1.8.
This business case demonstrates these benefits, which include the simplification
and strengthening of governance; maximising resources and services across the
Group; consistent financial covenants; increased investment capacity and the ability
to release and make best use of funding capacity; limited need for recharges
between companies; and helping to ensure the Group is ‘collaborative ready’ for any
future opportunities.
1.9.
The proposal to create a single RP in the Group is subject to incurring realistic costs
of change. The Group has developed a fall-back solution if the cost of consent
proves to be a barrier to completing the simplification.
1.10.
Extensive consultation has been carried out with tenants, leaseholders and
stakeholders and the feedback received has been taken into account by the Parent
and Subsidiary Boards when considering the case for consolidation.
1.11.
The Boards have also considered the outcomes of negotiations with local
authorities, funders and pension providers, as well as due diligence activity carried
out by the Group’s legal, treasury, tax and pension advisors.
1.12.
The simplification proposal has subsequently been agreed unanimously by the
Parent and Subsidiary Boards, subject to reasonable protections for customer
service and local representation.
1.13.
The timetable aims for consolidation on 1 April 2017 with an appropriate new funding
structure in place by June 2017.
1.14.
Overall a successful simplification of the Group appears to present a compelling
business case.
4
2.
INTRODUCTION
2.1.
The Thirteen Group was established in 2014 from the component subsidiaries of the
Fabrick and Vela Groups. The formation of the Group was predicated on delivering
efficiencies and maximising capacity and so from the outset there has been a focus
on saving money and making the most efficient use of resources.
2.2.
In December 2015, the Thirteen Group Board debated a report from the Group’s
legal advisors, Anthony Collins Solicitors LLP (ACS), which outlined options for
simplifying the Group. The Board agreed to explore the option of consolidating the
Group to become one RP, and consultation with all Partner Boards commenced
following a Board Development event on 5 February 2016. The Boards agreed with
this proposal in principle, with the following caveats:
2.3.
2.4.

Appropriate arrangements to ensure continued local focus and
representation;

A business case should be developed, to outline the benefits and
opportunities that a Group restructure would bring; and

Reassurance that customers’ and service users’ needs are reflected in
whatever governance structure is agreed.
These issues were addressed in a report to the Boards that outlined the likely
structure, process and high level timetable. It also covered those key issues that
need to be addressed to bring this project to a successful conclusion:

Lenders’ consents;

HCA consent;

Charity law and the need for Charity Commission consent;

Consultation with / consent from other key stakeholders;

Pensions; and

Other structural issues such as future-proofing.
Based on the work undertaken by ACS, the Group believes that the greatest benefits
from simplification will be achieved by bringing all the RPs together into an assetowning charitable parent. This has led to further investigation and due diligence,
which has enabled the creation of this business case.
5
3.
STRATEGIC RATIONALE
The proposed change to the Group structure will streamline the operations and
borrowing of the Group and enable it to invest more efficiently in the provision and
development of social housing in the areas in which it operates.
3.1.
Benefits Overview
3.1.1.
There are a number of benefits associated with implementing the revised Group
structure: the ability to release and make best use of funding capacity, maximising
resources and services across the Group, limiting the need for recharges between
companies and ensuring the Group is ready for any future opportunities.
3.1.2.
The Group needs to position itself in the best way possible to take advantage of any
opportunities that arise from the devolution agenda and establishment of a
combined authority. There are potential opportunities for Thirteen to have a
strategic leadership role in Tees Valley. Talks have been initiated with other RPs
and organisations in the region to discuss the potential for sharing services and
more collaborative working.
3.1.3.
Having four separate subsidiary RP Partner Companies within the Group (plus the
Parent) by nature increases bureaucracy and duplication, and is not an effective use
of money and resources. Consolidating the Group will enable us to reduce
duplication, eliminate waste and make best use of resources. The HCA is
increasingly keen to see that groups operate streamlined, less complicated and less
risky structures to drive efficiencies and value for money, and enable more effective
risk management.
3.1.4.
Savings can easily be realised by reducing the number of Boards and Board
Directors across the Group. This includes a reduction in staffing and resource
efficiencies in areas such as the Resources Team, as well as savings in Board
Director remuneration and expenses. It is estimated that these savings could be in
the region of £500k per annum.
3.1.5.
By far the greatest benefit of consolidating the structure will be the ability to release
capacity across the Group. The Group currently has four RP subsidiaries with four
sets of assets and four sets of loan covenants, with capacity in one and not the
others. By refinancing away from the current structure, Thirteen would save on
borrowing costs and release capacity by consolidating the assets into one RP; and
potentially unlocking resources to do more across the Group.
3.1.6.
From a practical perspective, all Thirteen Group employees, with the exception of
Thirteen Care and Support (TCS) staff, have recently been moved onto joint
contracts of employment. TCS is already on the same terms and conditions and so
we anticipate there will be few changes even though TUPE does apply. Staff will
be consulted with as required but it is envisaged there will be minimal impact on
remuneration and terms and conditions. Services are operated across the Group
by Thirteen staff on behalf of the Partner Companies. The proposed governance
structure would, therefore, reflect the existing organisational structure and ‘Team
Thirteen’ culture.
3.2.
Protecting Customer Services
3.2.1.
At the Board Development event, Board Directors agreed that most customers are
not interested in the landlord’s name or position in a Group structure; what matters
is that they receive consistently good services, regardless of their property type or
where they live.
6
3.2.2.
The way in which services are delivered will not be affected by the revised structure.
The Group operates a single customer contact centre, with one telephone number.
The implementation of an integrated ICT housing management system will enhance
the Group’s ability to operate consistent processes and deliver consistent levels of
service. The Group’s van fleet already prominently displays the Thirteen logo, along
with the logos of the individual Partner Companies.
3.3.
Local Representation
3.3.1.
One of the key issues for the Partner Boards was the concern that local
relationships, partnerships, knowledge and focus would be lost should the Partner
Companies be removed.
3.3.2.
There are two aspects to consider here: first of all, the strategic and operational
relationships that exist between the Partner RPs and their respective Local
Authorities, and, secondly, the arrangements that would exist to ensure local
representation is maintained and the customer voice is heard at Thirteen Board
level.
3.3.3.
Relationships with Local Authorities, both from a strategic and operational
perspective, would continue through the links already established with the Group’s
Leadership Team. The new Group Chair and Chief Executive have met with, and
written to, all relevant Local Authorities and further meetings have been scheduled.
3.3.4.
The new Group Chair and Chief Executive will be involved in establishing and
developing links with the new Combined Authority, with initial meetings having taken
place over the summer months.
3.3.5.
The Thirteen Board will need to be appropriately skilled to effectively manage the
affairs of the Group. An external Board recruitment consultant has been appointed
to oversee recruitment to the Board. Expressions of interest will be requested from
existing Board members within the Group initially, based on relevant skills,
knowledge and experience, and any vacancies which cannot be filled through
internal recruitment will then be advertised externally. The remuneration levels for
the Thirteen Board and Committees will not change.
3.3.6.
Following extensive consultation with the Thirteen Customer Council on ensuring
customer insight at the Thirteen Board level, it has been agreed that the Chair, or
another representative of the Customer Council, will be invited to attend each formal
meeting of the Thirteen Board and take part in all debates.
3.3.7.
Scrutiny of Group performance and services will continue through the Group’s
Customer Scrutiny Panel.
3.3.8.
Customer involvement will continue through the Group’s established involvement
framework.
7
4.
STRUCTURE
4.1.
Current Structure
4.1.1.
A diagram of the current structure of the Group is set out below:
4.1.2.
The Group has grown over time, most recently through the merger of the Fabrick
and Vela Groups in 2014. It now wishes to move to a simpler, more streamlined
structure in order to achieve the strategic benefits set out in section 3 of this
business case.
4.2.
Proposed Structure
4.2.1.
A diagram of the proposed new Group structure is set out below:
4.2.2.
In their report, ACS recommended that consolidating the five current RP members
- Thirteen Housing Group (THG), Erimus Housing Limited (EH), Housing Hartlepool
(HH), Tees Valley Housing Limited (TVH) and Tristar Homes Limited (TH) - to form
one charitable RP would achieve the greatest level of efficiencies. In this model,
the newly consolidated RP would be the Parent company, with subsidiaries as
appropriate to deliver development, support and diversified commercial activities.
This is the least complicated and least bureaucratic option, and the most cost (and
resource) effective.
8
4.2.3.
The following describes how the Group proposes to deliver the consolidation:
4.3.
Consolidation of the RPs within the Group
4.3.1.
There are currently five RPs within the Group. It is proposed that within the new
structure they will be consolidated into one, which will hold all social housing assets
within the Group. In order to consolidate the five RPs within the Group, it is
proposed that:
4.3.1.1. THG, EH, HH and TH will convert (using the statutory procedure under
section 115 of the Co-operative and Community Benefit Societies Act 2014
(CCBSA)) to become community benefit societies, rather than companies.
Section 117 CCBSA confirms that conversion of a company to a community
benefit society has no effect on any liabilities of the company existing at the
time of conversion.
4.3.1.2. TVH, EH, HH and TSH will then transfer all of their assets and liabilities to
THG using the transfer of engagements procedure under s110 CCBSA.
Section 110 CCBSA operates to vest (under statute) all assets and liabilities
of the transferring societies into the recipient entity and confirms that a
transfer of engagements shall not prejudice the rights of creditors of the
societies. The transfer of engagements process has been used many times
in similar consolidation arrangements.
4.3.1.3. The resulting RP entity (“Thirteen”) will be the Parent of the Group and will
be a community benefit society and exempt charity. It will hold all social
housing assets of the Group.
4.3.1.4. Through the creation of a charitable RP Parent it will allow its commercial
subsidiaries to Gift Aid surpluses up to it and take advantage of the nine
month Gift Aid rule, so that they have longer to shed potentially taxable
surpluses.
4.4.
Rationalising the commercial subsidiaries:
Optimus Homes Limited (Optimus)
4.4.1.
Optimus will be used as the Group’s design and build subsidiary, for the purposes
of achieving VAT efficiencies (“Devco”). The purpose of establishing Optimus as a
Devco is to enable the Group to maximise VAT recovery in relation to professional
fees. Essentially, Optimus will enter into all contracts and appointments on
Thirteen’s behalf and will then contract with Thirteen to deliver all of these services
‘up’ to it. However, this is unlikely to be implemented until 2017/18, as the Group is
already party to arrangements with the Spirit Partnership in relation to achieving
VAT efficiencies. It is expected that the Spirit Partnership will be wound up or
dissolved in due course.
4.4.2.
Although Optimus will be a wholly-owned subsidiary of Thirteen, it will sit outside of
the VAT group. It will, therefore, be able to claim back the VAT incurred on the
development costs it incurs. These savings can then be passed on to the Group
through a reduced price for design and build services, or through gift aiding profits
back up to Thirteen. This is a well-established VAT planning device utilised by many
RPs.
9
Portico Homes Limited (Portico)
4.4.3.
Portico will continue to act as the Group’s ‘JV hub’, designed to allow the Group to
easily undertake joint ventures for the purpose (primarily) of achieving development
objectives. It is proposed that a JV hub be established to allow the Group to more
easily enter into joint ventures with commercial organisations to develop for outright
sale. This has been suggested as a preferred model by the HCA. It should also
assist with tax recovery (in that Portico should be able to Gift Aid profits to Thirteen).
4.4.4.
It is also proposed that Portico will undertake development of outright sale and
affordable housing (either within Portico itself or through its joint ventures).
Development for outright sale will not usually be undertaken within Thirteen itself,
both because of the inherent risks associated with such activities (and therefore the
risk to social housing assets if such activities are not ring fenced in a separate entity)
and because of the tax treatment of income from such activities (which are not
usually treated as charitable activities).
Partnering Plus Limited (Partnering Plus)
4.4.5.
It is proposed that the current external partners of Partnering Plus be ‘bought out’
so that Partnering Plus can become a wholly owned subsidiary of Thirteen and be
used to house external-facing commercial activity which may not be deemed to be
charitable, such as the provision of repairs services and some education,
employment and support activities. The buy-out will be for a nominal value. If a buyout cannot be agreed with the external partners, it is proposed that Thirteen will
cease its involvement in Partnering Plus and that a new subsidiary should be
established for these purposes.
4.4.6.
It is also proposed that Partnering Plus may be used to process the sale of some
outright sale developments.
4.4.7.
Housing these activities in a separate commercial subsidiary (rather than within
Portico, for example) will help to ring-fence liabilities and assist in more preferential
tax treatment of the income. It allows there to be a focus on the growth of
commercial activities within Partnering Plus and also allows a separate brand and
recognition to be built.
Vela Housing Limited (Vela)
4.4.8.
The Group may wish to utilise Vela as either a social enterprise, charity or a costsharing group vehicle in the future. Whilst there does not appear to be a clear driver
to do so at present, Vela will be retained as a separate inactive subsidiary available
for use in future if required.
Future Proofing
4.4.9.
The Group may wish to create a future subsidiary, a company limited by shares,
either to be used as a cost sharing group vehicle or for solely undertaking
development for outright sale (although the Group would first explore utilising its
existing subsidiaries). This is not currently shown on the diagram above.
4.4.10. The Group may also wish to create a funding vehicle, to cater for any capital markets
issues. This is also not shown on the diagram above.
10
Thirteen Care & Support (TCS)
4.4.11. Specified activities currently carried out by TCS will be transferred to Thirteen, whilst
others outside of the Tees Valley area are being transferred outside of the Group. It
is proposed that TCS will be dissolved (and struck off the register as a charity) in
due course.
11
5.
FINANCIAL OUTPUTS
5.1.
Business Case for Consolidation - Financial
5.1.1.
The Diagram below compares the base position in the 2016 financial plan to the
position that would apply immediately after consolidation. The base financial plan
used in this analysis is the FFR plan submitted to the HCA in June, which has four
ring fenced borrowing subsidiaries. In the current arrangement each borrower is
treated as a separate entity, with its own cash and debt.
5.1.2.
Scenario 1 is the FFR financial plan immediately after consolidation. The only
changes between the base plan and Scenario 1 are:
the repayment of the Darlington loan and the £10m RBS / Erimus loans as
proposed in the 2016 Annual Treasury Strategy (which creates a saving in
the region of £185k in the first year); and

in the collapsed group, the single borrower is able to offset cash against
loans to reduce the net borrowing.
Millions

400
BASE FFR Loans
350
Scenario 1 Loans
300
BASE FFR Cash
250
Scenario 1 Cash
200
150
100
50
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
0
5.1.3.
A considerable saving is created by consolidating the Group’s loan facilities and
cash resources. It can be seen from this chart that after consolidation the Group’s
borrowing requirement is significantly lower and it is this which creates the most
significant savings. In this Scenario, by year 30, the cash balances are forecast to
be £30m higher.
5.1.4.
Two of the existing lenders (RBC Syndicate £105m loan and Santander £13.2m
loan) have proposed to uplift to their loan margins in consideration for giving consent
to the Consolidation. The proposal from RBS, the largest lender to the Group with
loan facilities of £242.7m, involves a restructuring fee but is otherwise financially
neutral; it also improves the borrowing liquidity of the Group going forward with a
large Revolving Credit Facility.
5.1.5.
The following diagram compares the FFR plan to the plan assuming the lender’s
proposals are accepted. Note – this is the position BEFORE any proposed
additional investment activities.
12
Millions
400
Cash - Scenario 2
350
BASE FFR Cash
300
Loans - Scenario 2
BASE FFR Loans
250
200
150
100
50
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
0
5.1.6.
This shows that even after taking into consideration the lenders proposals for
increased margins that a strong business case exists for the Consolidation. In
Scenario 2, by year 30, the cash balances are forecast to be over £28m higher.
5.2.
Financial Covenants after Consolidation
5.2.1.
The introduction of FRS102 for the financial statements means that financial
covenant definitions will need to be amended across all the loans. Given the timing
of the change, the Group has sought, where possible, for the covenants to be
simplified and made consistent throughout.
5.2.2.
Following negotiations with lenders the Group is confident that in relation to FRS102
the result will be a financially neutral position, i.e. the covenants will be set at a level
post-consolidation that is no better or worse than before FRS102.
5.2.3.
In relation to HH and TH, where the existing RBS financial covenants are based on
the cashflows arising from an annually approved financial plan, RBS has proposed
interest cover and gearing on the same basis that already applies to the Erimus and
TV RBS loans at levels that match the existing TV and Erimus loans. This means
that following consolidation the Group would no longer be restricted by tightly drawn
covenants that were originally deigned to quickly repay the loans.
5.2.4.
The following table shows the new financial covenants before and after
consolidation (note: this is a theoretical exercise showing the tightest covenant
because currently the covenants apply to each Borrower).
Financial Covenants
Target
2017
Forecast
2017
Target
2022
Forecast
2022
Interest Cover existing
110%
285%
110%
265%
Interest Cover after consolidation
110%
313%
110%
285%
Gearing existing
60%
31.76%
60%
22.92%
Gearing new after consolidation
60%
29.08%
60%
20.30%
13
5.3.
Financial Capacity after Consolidation
5.3.1.
The combination of the financial savings and changing the financial covenants to
conventional tests means that post-consolidation the Group will have access to the
financial capacity of the Group as a whole.
5.3.2.
This means that the overall borrowing capacity, which before consolidation is limited
by the financial plan consent requirements of the HH and TH loan facilities, has
increased. The switch to conventional financial covenants maximises the financial
capacity of the Group.
5.3.3.
The HH and TH loans are heavily over-secured and within their proposal for consent
RBS has agreed to the release of excess security from charge. This concession will
provide maximum loan security asset cover to use on new loan facilities, which will
be in the region of £300m in asset value to support additional investment in new
development and regeneration within the Tees Valley.
5.3.4.
None of the lenders has sought to increase their minimum-security requirement or
impose unreasonable conditions in return for consent that would affect the financial
capacity of the Group.
5.4.
Costs and Benefits
5.4.1.
As would be expected there are fairly significant costs associated with gaining
consent from the Groups Funders, in addition to the costs for the support from a
range of advisors in carrying out the consolidation, as provided in the table below;
Analysis
Pension:
SHPS
30.0
Growth Plan
20.0
LGPS
30.0
Funders:
Consent
Legal costs
Other Legal advice
1,125.3
90.0
125.0
Recruitment
4.0
Tenant Consultation
30.0
Treasury Advice
27.5
Tax Advice
25.0
Total
5.4.2.
£000’s
Cost item
1,506.8
Many of these costs will be incurred on, or around the time of, the consolidation, in
particular the fees for consent from the Funders, and are more than offset by the
savings and capacity generated as a result as can be shown in the table below, with
a payback on costs being delivered in just over one year.
14
5.4.3.
Given that a significant amount of savings and all of the additional capacity comes
from the consolidated loan book, we did consider whether the adoption of a Treasury
Vehicle could also deliver the same degree of savings and capacity, but this proved
not to be the case, as it does not overcome the restrictions on disposals / on-lending
that the consolidation would achieve.
5.4.4.
Group Consolidation Interest and Finance costs Savings Summary
2016/17
£000
2017/18
£000
2018/19
£000
2019/20
£000
2020/21
£000
FFR 2016
13,148.5
13,313.6
13,361.6
14,343.1
15,544.2
30 year
Total
£000
196,857.6
Post
Consolidation
12,034.3
13,334.2
12,120.4
12,253.9
12,860.5
167,621.4
1,114.2
(20.6)
1,241.2
2,089.2
2,683.7
29,236.5
(Costs)/Savings
Achieved
5.4.6
It should be noted that the savings shown in 2016/17 are in relation to the
repayment of a £15m RBS loan facility which was agreed after the FFR was
submitted, in addition to the £10m proposed repayment as mentioned in
paragraph 5.1.2. Both of these have been agreed as a result of achieving the
savings targets we had set in response to the 1% rent cut.
5.4.7
In 2017/18 it can be seen that the costs for consent, as mentioned above, are
largely offset by the interest payment savings as a result.
5.4.8
Interest rates over the life of the plan are still assumed to increase from an
average of 3.89% to 6.5% in 2023/24 and will increase further to over 8.0% in
2035/36. Well ahead of this time the Group will have been able to look at various
re-financing options, including a Private Placement, in order to keep these costs to
a minimum wherever possible. Having said that, simply by having all assets and
loans in one company it will enable the Group to borrow less and manage
borrowing more efficiently (as shown in 5.1.5 above) because it eliminates the
barriers to interest cost savings that the Group currently cannot avoid.
5.4.9
The other significant saving to the Group (which is not included in the table above)
will be delivered following a review of the support services, in Governance and
Finance in particular, as there will be a direct impact (reduction) on the amount of
work required to support the consolidated structure current, in addition to the
reduction in direct costs associated with Board Directors. These have been
estimated to be in the region of £500k per annum (£15m in total) and are included
in the Management Costs line of the 30 year financial plan attached at
Appendix B.
15
5.5.
Stress Testing
5.5.1.
A full suite of stress testing has been undertaken and the financial plan shows that
the consolidation has the effect of improving both the level of gearing and interest
cover compared to the position that currently applies.
5.5.2.
A summary of the stress testing that has been undertaken on the post-consolidation
financial plan is included at Appendix B. The focus of this exercise has been to
look, not only at the additionality the consolidation will bring but also how we will
better withstand a potential future rent cut, the impact of the Local Housing
Allowance (LHA) cap on rents and service charges, voluntary Right to Buy, a
significant contract failure and pension cost increases, and combinations thereof.
5.5.3.
There are scenarios that will break the plan, not least a further 1% rent reduction
coupled with the LHA cap. The scenarios that ‘break plan; and where they break it
are highlighted within Appendix B and the results of this exercise have been
shared with a number of Board Directors from across the Group at a Board
development event held in October 2016, in order for us to collate a series of
responses and actions ahead of such scenarios occurring.
5.5.4.
At this event we also considered the implications of not gaining consent from any
of the Local Authority partners, in addition to looking at how best to use the £300m
additional capacity in the delivery of affordable and outright sales units. These
scenarios did help to underpin the reason for the consolidation, the benefits to be
gained and also why it was important that we gained consent from all parties.
16
6.
RISK MITIGATION
6.1.
Thirteen has a robust assurance and risk management framework, and strategic
risks are reviewed and monitored on a quarterly basis. A comprehensive risk
register has been developed to underpin this project and ensure the mitigation of
potential risks and this is attached as Appendix C.
6.2.
The two key risks with the highest scoring (red) risk factor in relation to the delivery
of the project have been identified as follows:
Risk 1
Risk 6
Lenders not supporting the proposal

Meetings have taken place with lenders and negotiations are
ongoing.

We have in principle confirmation from the relevant lenders that
consent will be forthcoming.
Stakeholder Support (Local Authorities)

6.3.
The Group Chief Executive and Chair have had meetings with
all the Local Authorities with the objective of securing inprincipal consent before a formal request for consent is made.
The majority of the risks, as expected, fall into the amber category. Risk reduction
activity has been identified for each risk; the project team meet fortnightly, monitor
the risk register and address the risks as they emerge.
17
7.
GOVERNANCE
7.1.
Having an asset owning RP as the Group Parent is intended to demonstrate the
Group’s commitment to being, at its heart, a social housing provider. The Board will
need to be sufficiently skilled in order to oversee the regulatory requirements for the
Group, alongside potentially diversified activities which, in any case, are proposed
to be housing related.
7.2.
The HCA Governance and Financial Viability Standard states that boards of RPs
should manage their affairs with an appropriate degree of skill, independence,
diligence, effectiveness, prudence and foresight.
7.3.
A board that has been appointed on the basis of skills and expertise is likely to best
fulfil this requirement.
7.4.
After simplification, the Thirteen Board will comprise 11 members, including:






Group Chair;
Senior Independent Director (who is also the Chair of the Remuneration
Committee (RemCo);
The Chairs of the Treasury and Investment (T&I) Committee and Audit and
Risk (A&R) Committee;
The Chairs of Partnering Plus and Portico Homes;
1 Executive Board Director (Group Chief Executive); and
4 Independent Board Directors.
7.5.
The composition and terms of reference for the Board and Committees have been
agreed by the Thirteen Board, and skill requirements have been assessed with
advice from an external independent consultant. Existing Board Directors from
across the Thirteen Group will initially be invited to apply for positions on the new
Thirteen Board and Committees, subject to having the required skills and
knowledge, with external recruitment being sought for vacancies as a result of skills
gaps and/or insufficient appropriate applicants. The independent consultant will
support the recruitment process in accordance with the identified skills and
competency framework.
7.6.
The Thirteen Board will be supported by three Committees – RemCo, T&I
Committee and A&R Committee.
7.7.
In relation to the commercial subsidiaries, it is proposed that:




Optimus will have a Board consisting of 2 Executives and 1-2 NonExecutives;
Portico will have a Board of 4-5, comprising 2 Executives and 2-3 NonExecutives;
Partnering Plus will have a Board of 5, comprising 2 Executives and 2-3
Non-Executives; and
Vela will have a Board comprising only 2 Executives, while it remains
inactive.
7.8.
The governance arrangements for the proposed cost sharing group and funding
vehicle have not been decided but are very likely to be broadly the same structure
as Portico or Partnering Plus.
7.9.
Following restructure the Group will continue to regularly review the skills matrix to
ensure that the Board remains effective and to identify any future skills/knowledge
gaps.
18
8.
REGULATORY COMPLIANCE
8.1.
The HCA has anecdotally commented that it expects to see greater consolidation
within the sector, particularly as RPs readjust to the impact of the four year rent
reduction and the introduction of the voluntary Right to Buy. These proposals fit well
with this general expectation.
8.2.
A key driver of the consolidation is to achieve greater efficiencies, which is aligned
to the requirements of the Value for Money Standard. The proposed structure is
known to be the HCA’s preferred option when assessing value for money.
8.3.
The proposed governance arrangements for the Group will meet the requirements
of the Governance and Financial Viability Standard.
8.4.
In undertaking any non-social housing activity within the Group, appropriate stress
testing will be undertaken and the potential risk to social housing assets minimised.
8.5.
Tenant consultation has been undertaken in line with the requirements of the Tenant
Empowerment and Involvement Standard.
19
9.
TIMETABLE
9.1.
In parallel with the simplification proposal, the Group has developed an outline
Funding Plan to refinance a proportion of its existing loan facilities in order to
maximise the benefits of the new structure. Interest rates are remarkably low and
this potentially presents the Group with an opportunity to replace short and medium
term loans with some long term fixed rate debt.
9.2.
The Funding Plan is aimed to address the inefficiencies and risks associated with
the existing arrangements:


9.3.
Tristar and Housing Hartlepool have potential capacity to invest but are
restricted by the terms of their existing funding arrangements which predate joining the Group back to their origins as large scale voluntary
transfers, such as business plan consent, LSVT financial covenants and
restrictions on borrowing elsewhere without consent; and
All members of the Group are locked into historic arrangements that
require the Group members to repay capital; for example Erimus, Tees
Valley, Tristar and Housing Hartlepool all have bullet repayment loans that
mature in March 2019.
The key milestones plan is attached as Appendix E.
summarises the key milestones:
Key milestone
9.4.
The following table
Target date
Obtain funders’ in principle consent
Complete
Obtain local authorities’ in principle consent
November 2016
Undertake tenant consultation
Complete
Boards to sign off business case
Complete
Charity Commission consent to conversions
December 2016
Shareholder approvals to conversions
December 2016
Staff consultation completed
December 2016
Boards to sign off funders’ consent letters
January 2017
Formal local authorities’ consents
January 2017
Funders’ consent letters agreed and entered into
January 2017
HCA consent
February 2017
FCA registration of conversions of HH. EH and TH
February 2017
Shareholder approvals to transfer of engagements
February 2017
FCA registration of conversion of THG
30 March 2017
FCA registration of transfers of engagements
1 April 2017
Asset transfers completed
1 April 2017
Updating Land Registry
Post April 2017
Refinancing
Post April 2017
Additional funding is not required before the consolidation. The timetable for new
funding will start immediately after the Boards confirm their agreement to pursue the
simplification of the Group structure and is likely to complete in June 2017.
20
10.
CONSENTS
Thirteen has developed a comprehensive Consultation and Communication Plan
(Appendix F). The following summarises the key areas covered:
10.1.
Tenants:
Although there is no requirement to ballot tenants an extensive programme of
consultation has been delivered to fulfil the HCA’s requirements, including the
distribution of explanatory leaflets requesting feedback to every tenant and
leaseholder; consultation with the Thirteen Customer Council throughout the
process; and information and requests for feedback shared via social media. Full
details can be found in the Consultation and Communication Plan attached as
Appendix F. Details of the tenant consultation outcomes are included as Appendix
G.
The results of the consultation show that only 3 tenants expressed opposition to the
proposed consolidation. Where the consultation created a query or request for
service, each responder has been contacted to resolve the issue.
10.2.
Staff:
All staff within the Group will continue to be consulted with and kept appraised
throughout, although all staff other than TCS staff are already on joint contracts of
employment. TCS staff are already on identical contracts and therefore, although
TUPE applies, there will be minimal impact from the change.
10.3.
The HCA:
Initial discussions have been undertaken with the HCA and we anticipate that
approval will be forthcoming subject to approval of this business case and due
diligence.
In seeking the HCA’s consent, the following protocol has been used:
10.4.

A detailed review of governance arrangements;

Collecting evidence of due diligence into the effect of the consolidation,
including confirmation of the ultimate liabilities of the “merged” Parent
organisation;

Ensuring confirmation that key stakeholders have been consulted and
that, for example, Local Authorities and funders have not raised any
objections;

Demonstrating the value for money that will be achieved; and

Reviewing the results of tenant consultation.
The Charity Commission:
Charity Commission consent will be required to convert Erimus, Housing Hartlepool
and Tristar from registered to exempt charities. The Charity Commission was
approached in November 2016 in relation to its consent.
21
10.5.
Existing funders to the Group:
The Group presently has 8 lenders: Santander, RBS, RBC Syndicate (Nationwide
and Lloyds), Barclays, Orchardbrook and Darlington. The Darlington loan will be
repaid prior to the consolidation. Consent is not required from all lenders and in
particular; consent is not required from Barclays.
The Group’s lenders have been contacted individually with tailored proposals in
relation to the existing arrangements. This includes standardisation of financial
covenants and changes to the existing loan agreements to enable the Group to take
advantage of its increased capacity after simplification.
All of the relevant lenders have indicated their agreement in principle to give consent
for the consolidation and have made a written proposal which is the subject of further
discussions.
The existing lenders who are still actively lending have also been briefed on the
need for future funding, including the possibility of a Private Placement in order to
gauge their appetite for funding the consolidated group. The response has been
universally positive.
In all cases, consents will have to be documented before the proposed transaction
can complete.
10.6.
Other stakeholders, such as Local Authorities, partners, contractors etc:
Each stakeholder has been approached individually for its consent where required.
For example, Erimus, Housing Hartlepool and Tristar all have ‘golden share’
arrangements in place with their respective Local Authorities. This is one example
of various transfer commitments / contractual arrangements that arose from the
original housing transfers.
In all cases, consents will have to be obtained before the proposed transaction can
complete. It is envisaged that formal consent will be sought at special general
meetings in December 2016 to February 2017.
Reviews have been carried out to understand any implications for existing
procurement and contract arrangements. The objective is to understand any
liabilities that arise from the consolidation, including the effect of any key contracts
which may have provisions allowing them to be terminated where there is a change
of control. It is generally the case that contracts will automatically be “vested” in
Thirteen as part of the transfer of engagements.
10.7.
Pensions
Advice has been sought from First Actuarial and ACS, and a note setting out how
we will avoid any debt crystallisation is included in Appendix I. Due to the nature in
which the schemes will be novated to Thirteen, we do not envisage there being any
additional bond requirements.
22
Appendices:
A. Executive Summary of Thirteen’s Strategic Plan - including pen portraits of the existing
Thirteen Board (noting that the Board is under review) and Executive Team
B. Proposed Financial Plan (extracts) and Sensitivities / Stress Testing
C. Group Consolidation Risk Register
D. Conversion Process Report
E. Key Milestones Plan
F. Consultation and Communication Plan
G. Tenant Consultation Outcomes
H. Tax Implications Report
I. Pensions – Summary of Advice and Process
J. Structuring Development Activity Report
23