The UK social housing sector has reached another level of funding sophistication with the financial close of the biggest housing stock transfer in Europe. This hybrid/corporate project for the newly established Glasgow Housing Association comprises £725 million ($1.1 billion) of 30-year term loans from the commercial banking sector and the EIB. Ultimately the deal will see over £4 billion invested into the housing stock owned by GHA.

The deal involves the transfer and refurbishment of 81,336 homes from Glasgow Council to Glasgow Housing Association (GHA) at a purchase of price of £25 million (assuming no VAT for the first 10 years of capital expenditure) with over £1 billion of historic debt being written off by Glasgow Council.

But it is not simply the scale of the transaction that puts it in another league from the smaller stock transfers to registered landlords that have been a phenomenon of UK social housing for the past 10 years. The project comes with a number of ?bells and whistles? that are firsts for the sector ? notably the incorporation of second stage transfers to smaller housing associations and the participation of the EIB as an equal and direct lender.

The deal is split almost 50/50 between the £575 million of commercial and £150 million EIB debt and £700 million in funding from the Scottish Executive. The EIB debt is something of a departure for the multilateral in that it is a clean loan (not a guarantee) for the full 30-year term with very few drawdown conditions.

All funding is directed through a conduit and wholly owned subsidiary of GHA ? GHA Finance Ltd ? which will act as a driving force towards private-sector style treasury management. And the debt deliberately exceeds forecast requirements ? overall the project needs £694 million to fund the stock transfer and new build units with peak debt in year 11 after transfer to GHA.

From the banking perspective the deal looks complicated but tidy. GHA has industrial and provident society status and is a not-for profit entity with an obligation to sell down to smaller housing associations ? the first second stage transfer will be in two years. The transfers add another potential 10 years to the 30-year term through extensions.

The project is further complicated through inter-creditor issues spawned by the different grant income streams and timings that have been included in the structuring. There is a central heating grant of £20.6 million over the first five years as part of the Scottish Executive's warm deal programme and a repayable grant from the Scottish Executive of £302.5 million over the first 10 years of GHA existence. In addition, the project benefits from a £12.5 million annual efficiencies fund grant in years 3-10 and a demolition grant of £114 million over seven years. There is also a £113 million re-provisioning grant over seven years towards the cost of building 2800 new homes and owner-occupier grants of £100 million during the investment programme from years 1-10.

In addition to the lender comfort created by grants, rentals are paid direct to GHA and housing benefit accounts for around 75% of rental income across the portfolio. A service level agreement has also been put in place with the Council to ensure that delays in payment, and their potential impact on cashflow, are minimised.

Although in the planning stages for four years, the project closed rapidly after calling for expressions of interest in November 2001. The deal was put out to tender in August 2002 with BAFOs invited and received in November. Royal Bank of Scotland (RBS) and Halifax Bank of Scotland (HBOS) were appointed as lead arrangers with Nationwide and Abbey National taking co-arranger positions. Ernst & Young acted as financial advisor to GHA.

On the legal side Trowers & Hamlins provided GHA with legal counsel. Clifford Chance acted for the lenders with Macgregor Donald acting for the Scottish Executive. KPMG provided business plan auditing.

A further small-scale general syndication is expected and although pricing has not been released it is said to be very competitive for the sponsor compared with other smaller stock transfers.

GHA is unlikely to be repeated on this scale in the short term but it has set technical precedents that may be mimicked by the other Scottish social housing transfers already underway. Dumfries and Galloway Council has attained ministerial approval for a deal in mid-April led by Bradford & Bingley. And Edinburgh is also considering a number of small transfers.

Ironically, while the deal sets a benchmark for stock transfers it is a double-edged sword for the progress of the UK's eight pathfinder social housing PFI schemes, all of which continue to move at a very slow pace.

The first PFI deal reached commercial close last month ? the Plymouth Grove and Stockport Road scheme in Manchester sponsored by Harvest Housing and Gleeson.The project totals £90 million of which £34 million in 30-year project debt will be provided by Nationwide.

The problem with the PFI schemes is that they are not only small but often require changes to local authority regulations, and unlike GHA run the political gauntlet in that they do not run as not-for-profit.

With GHA demonstrating the willingness of the banks to lend to not-for-profit on a large scale and at politically acceptable competitive pricing, the UK PFI programme could well be set to follow the route recently proffered by the Office of the Deputy Prime Minister ? that it may be better suited to new-build rather than refurbishment of existing portfolios.

Glasgow Housing

Association Finance

Status: Closed March 2003

Description: Largest European social housing stock transfer

Sponsor: Glasgow Housing Association

Total debt: £725 million

Commercial debt: £575 million

EIB debt: £150 million

Lead arrangers: Royal Bank of Scotland; Halifax Bank of Scotland;

Co-arrangers: Nationwide; Abbey National

Financial advisor to sponsor:

Ernst & Young

Legal counsel to sponsor:

Trowers & Hamlins

Legal counsel to lenders: Clifford Chance

Auditing: KPMG

Valuation: FPDSavills