U.K. housing associations, including Hanover Housing Group and The Hyde Group, are considering using structured interest rate products for the first time. The associations are looking at lender's options, borrower's options (LOBO), which typically have a LIBOR-linked rate fixed favorably for the borrower over the first one to five years after this the lender is able to raise the rate, at this point the borrower has the right to repay the loan. These allow the associations to raise capital more cheaply than the bond and loan markets, which are their traditional source of funding. The optionality provides a funding discount and the borrower still benefits from longer-term liquidity than short-term debt would offer.
Conor O'Shaughnessy, assistant finance director at Hyde, said Hyde is looking to negotiate a loan of GBP200 million (USD376 million) and would likely arrange around 20% through LOBO loans. Hyde has a debt portfolio of GBP400 million.
Nigel Herbert, director of treasury and strategic planning at Hanover in Staines, said it will conduct a portfolio review in the next six months to decide what types of products it should use. "We have talked with lenders about some of the more interesting ideas," said Herbert.
Housing associations' treasury activities are strictly regulated by the Housing Corp., which only approves derivative strategies for efficient portfolio management. In spite of these restrictions, data from the corporation shows the use of derivatives to manage liabilities is rising. Last year, the unhedged variable rate borrowings represented 55% of all U.K. housing associations' variable rate borrowings, compared to 59% for 2002. "Risk management is becoming more of an issue," said Herbert.