Numerical Apportionment a working guide in social housing
In recent years a numerical apportionment of security has become increasingly popular as a means of securing bond issuances funding social housing, where there are large numbers of individual properties charged and regular release of security. Whilst numerical apportionment is more common in EMTN programmes and stand-alone capital market issuances, most traditional loans tend to rely on specific apportionment of property. As a result there remains a general lack of awareness of how numeric allocation of security works in practice.
The Law Debenture Trust Corporation p.l.c. is a corporate trustee with longstanding experience in the capital markets, and specifically in relation to loans to social housing clients with large numbers of units charged, and we are very familiar with the practical workings of numerical apportionment. Our team have been involved in security trust structures that allow for both specific and numeric allocations since their inception in 2001. The first instance followed the transfer of Sunderland Council Stock of some 36,000 units to a newly created Housing Association (now Gentoo). With a large-scale demolition programme and regular disposals anticipated necessity became the mother of invention and the numeric apportionment was born.
Associations will already be aware of the ability to charge and allocate specific property in a security trust structure that makes the reallocation of security to new lenders a simpler process. Under the security trust structure additional unallocated units can also be charged for quick allocation to lenders. However, whilst allocation is easier, lenders still need to agree and undertake due diligence on this new security which obviously still takes time. The allocation of property on a numerical apportionment basis (NAB) bypasses this and relies on the charging of sufficient properties to the security trustee to cover specific lending need (and indeed other security requirements such as margin calls on stand alone derivatives), but with a surplus to allow for ongoing releases. The NAB units form an overall pool of security from which allocations can be made numerically rather than directly/specifically to a lender or bond facility. In other words rather than taking security directly over 10 Acacia Avenue etc. the lender has security over whatever proportion of the total pool provides them with the necessary level of asset coverage. So on creation of the loan, the required asset cover is calculated based on the average value of the numerically apportioned units, and the required number of units in the pot is allocated in order to satisfy the lender’s required asset cover ratios. This allocation takes the form of a number of unspecified units rather than a specific list or even the actual percentage. As properties are sold, disposed of, or are removed from the overall numeric pool the pool will reduce but the actual number of allocated units does not change so long as there are still surplus units charged.
From a lender’s perspective, if there are surplus units then the effect on security of these releases will be very small when compared to the release of a specifically charged property where substitute security would need to be charged. As a result each release is agreed by the trustee on the basis of certification from the borrower that the asset cover tests remain satisfied and with statutory disposals this is often covered only in a quarterly review. The quarterly review reassesses the average value of remaining units after a reconciliation with the security trustee by the borrower either direct or through Asset Core after which they instruct the security trustee to make an adjustment to the numeric apportionment if the average value has changed. The standard revaluation provision also gives rise to periodic reviews of the NAB allocations and adjustments made for these.
NAB works best when there are sufficient surplus units to allow for expected releases otherwise a borrower will soon need to review the apportionment and undertake releases or substitutions. It is worth remembering that whilst for bond issues the trustee can look at new security, it is a costly proposition if charging exercises are done ad hoc. Also, if there are several lenders with NAB units they each have to be happy with the due diligence and each will need to be involved in the charging of additional stock. If you have several parties sharing the numeric pot a realistic surplus is key.
The numeric security trust deeds do allow for lenders to switch from NAB to a specific allocation basis but obviously that would need to be agreed by all affected lenders. If an enforcement ever took place a specific allocation of property would be decided by an independent review by a valuer allocating what they would determine as a fair cross section of the pot.
In summary the NAB is useful for portfolios of property used as security that are subject to regular change. So long as surplus units can be put into charge, releases are effectively taken from this surplus without significantly impacting on expected loan asset coverage, removing the need for reassessment by lenders each time. Use of NAB has been relatively limited to date and some bank lenders still have a preference for the traditional specific apportionment of loan security. However, NAB presents a clean, efficient and logical basis upon which Housing Associations can manage their loan security – indeed, if the sector was starting with a blank sheet of paper then NAB may well be a more obvious structure. As it is, Housing Associations are using the set up of EMTN programmes to start shifting to a NAB basis and may opt to move more of their security arrangements across to this basis as legacy banking facilities are gradually repaid.
LawDeb have a team of experts with significant experience in NAB within the social housing sector. For further information please don’t hesitate to contact any of the Corporate Trust team.
