THFC

1

The Housing Finance

Corporation:

Non deal-specific

Investor Update September 2016

THFC THFC

Legal Disclaimer

For the purposes of the following disclaimer, references to this presentation shall mean these

presentation slides and shall be deemed to include references to any related speeches made by or

to be made by the management of The Housing Finance Corporation Limited (THFC), any questions

and answers in relation thereto and any other related verbal or written communications.

This presentation may only be communicated or caused to be communicated in the United Kingdom

to persons who have professional experience in matters relating to investments falling within Article

19(5) of the Financial Services and Markets Act 2000 (Finance Promotion) Order 2005 (the “Order”)

or high net worth entities who fall within Article 49(2) (a) to (d) of the Order (all such persons being

referred to as “relevant persons”). Any investment or investment activity to which this presentation

relates is available only to relevant persons and will be engaged only with relevant persons.

This presentation is being directed at you solely in your capacity as a relevant person (as defined

above) for your information and may not be reproduced, redistributed or passed on to any other

person or published, in whole or in part, for any purpose, without the prior written consent of THFC.

The information in this document is subject to change without notice, its accuracy is not guaranteed,

and it may be incomplete and is condensed.

These presentation slides may contain certain statements, statistics and projections that are or may

be forward-looking. The accuracy and completeness of all such statements, is not warranted or

guaranteed. By their nature, forward-looking statements involve risk and uncertainty because they

relate to events and depend on circumstances that may occur in the future. Although THFC believes

that the expectations reflected in such statements are reasonable, no assurance can be given that

such expectations will prove to be correct. There are a number of factors which could cause actual

results and developments to differ materially from those expressed or implied by such forward-

looking statements.

2

THFC

THFC Group is:

• A group of mutual finance vehicles whose sole

purpose is lending on minimum prescribed,

secured, terms to UK registered Housing

Associations.

• No THFC Vehicle undertakes maturity

transformation, nor interest or currency risk.

• Each vehicle acts as a credit principal and is

governed by a trust deed.

• All cash-flows are siloed. There is no inter-

dependence between borrowers in one vehicle, nor

between THFC vehicles.

• Each vehicle is designed as a look-through to the

underlying loans made.

• THFC Group is not regulated, but circa 50% of the

Group loans (AHF) are fully guaranteed by the

Department for Communities and Local

Government (DCLG) and both the HCA and NHF

have been shareholders since inception in 1987.

3

THFC

THFC Investor Relations

• Feedback from Investment Association

to HAs on the quality of disclosure

• Made us think about how we represent

the different vehicle portfolios within the

THFC stable:

• Active:

• AHF PLC

• THFC Ltd

• Historic

• THFC (Indexed )1 Ltd

• THFC (Indexed) 2 Ltd

• THFC (Social Housing Finance) Ltd

4

THFC Five Year Financial Record

£000’s 2012 2013 2014 2015 2016

Total Revenues 3,285 4,195 8,316 8,344 8,422

Total Costs 2,047 2,341 3,662 3,201 4,301

Surplus after tax 1,007 1,410 3,572 4,062 3,289

Group Accum. Reserves

11,583 12,993 16,565 20,627 23,916

Group Loans Outstanding

2,882m 3,124m 3,368m 4,155m 5,087m

THFC Limited Reserves

7,575 8,861 12,248 14,238 14,986

5

THFC Group 2016 results and 2017 budget

2016

Actual

£000’s

2017

Budget

£000’s

Total Revenues 8,422 10,021

Total Costs (4,301) (4,197)

Surplus after tax 3,289 4,659

Accum. Reserves 23,916 28,575

Loans

Outstanding

5,087m

5,565m

• New AHF lending volumes

exceeded budget in 2016 by

£163m despite inevitable delays

causes by the July 2015

Government Budget.

• 2017 revenues once again driven

by AHF bond/EIB arrangement

fees and associated growth in

annual fees.

• 2016 costs impacted principally

by further pension provision for

future deficit contributions

6

THFC

THFC Limited – portfolio data

7

THFC

Bond Rating (S&P) Outstanding £k Index Constituent

Funding No.1 A 235,205 iBoxx

Funding No.2 A 370,850 iBoxx

Funding No.3 A 625,300 iBoxx

THFC Ltd Loan Portfolio as at 30 June 2016

THFC Ltd Rated Issuance

-

500

1,000

1,500

2,000

2,500

3,000

0

50

100

150

200

250

300

350

400

2011 2012 2013 2014 2015 2016

Outstanding Loan Balance £m (RH Scale)

Number of borrowers

Number of Loans

0%

10%

20%

30%

40%

50%

60%

2011 2012 2013 2014 2015 2016

Top 5 exposures as a % of loan book

Top 10 exposures as a % of loan book

Top 20 exposures as a % of loan book8

THFC Exposure balances by HA Group 30 Jun 16

THFC — Top 10 exposures

Borrower (Group) Rating Current

Balance

1 Southern G15 A1 145,482

2 A2Dominion G15 A+ 135,221

3 Network G15 - 130,617

4 Family Mosaic G15 A1 92,927

5 Home A 65,467

6 Paradigm 65,000

7 Hyde G15 AA- 62,648

8 Genesis G15 Baa1 56,500

9 Thames Valley 54,111

10 Westcountry 47,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000£

00

0's

Individual HA Group Loan Balances

9

THFC

East Midlands Total 4%

East of England Total 2%

London Total 35%

National Total 6% North East Total

1%

North West Total 6%

Northern Ireland Total

6%

Scotland Total 5%

South East Total 9%

South West Total 7%

Wales Total 8%

West Midlands Total 6%

Yorkshire and the Humber Total

5%

Geographical Portfolio Spread by Current Balance

10

THFC

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

To

tal L

oa

n B

ala

nce

s '0

00

's)

Percentage Cover MV-ST

Strong Over-Collateralisation THFC - Fixed Charge Asset Cover

30 Jun 16

THFC has an additional

security covenant:

Net annual Income from

Security must always cover

Interest payable on the loan

11

THFC Asset Cover History

• Significant new business written between 2009 and 2013 with asset cover

between 150% and 200%

• Withdrawal threshold at 200% delivers improved over-collateralisation over

the long term

• Significantly more conservative compared to own-name bond issues where

115% MVT cover is the norm

Quarter End THFC Group THFC Only

% %

31/03/2016 233 216

31/03/2015 226 209

31/03/2014 228 211

31/03/2013 233 215

31/03/2012 244 221

31/03/2011 254 237

31/03/2010 296 275

31/03/2009 318 306

31/03/2008 294 293

12

THFC

Loans funded by bonds issued by THFC (Funding No 1) plc, THFC (Funding No

2) plc and THFC (Funding No 3) plc have bespoke liquidity resources and a two

year grace period between legal final and expected final maturity dates.

• THFC (Funding No 1) plc (the Issuer) has the benefit of access to a liquidity facility

provided by RBS

• Sized at 2 years’ of interest (£24.1million supporting £235.2million of debt)

• Following downgrade of RBS (short term rating) the facility has been drawn in full and held in

cash

• Can be utilised to cover any cash flow shortfall at the Issuer level (i.e. not just in the event of

non-payment by an underlying borrower)

• THFC (Funding No 2) plc and THFC (Funding No 3) plc

• Underlying loans to individual borrowers have a requirement for an interest service reserve

equal to one year of interest

• Can be used by THFC to service its loan to Funding No 2 or Funding No 3 in the event of non-

payment of interest by an underlying borrower under the terms of specific loan agreement

• Total interest service reserves of £56million supporting £996.15million of debt

• Loans funded by Debenture Stocks and bank loans have no bespoke liquidity

resources. Liquidity to cover cash-flow shortfalls while enforcing security in

relation to the defaulted loan would be limited to THFC’s cash reserves and

any bespoke facilities negotiated.

Liquidity Resources in Stress Scenario

(underlying borrower default)

13

THFC THFC Ltd Annual Cashflow with No

Liquidity Risk Mitigation - Top 20 as at 30

June 2016

0

1,000

2,000

3,000

4,000

5,000

6,000

Unmitigated Cash Flow 14

THFC

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

2016 2019 2023 2025 2027

Nom

ina

l (£

00

0's

)

Bullet repayment debt maturity profile –

debenture stocks

15

THFC 11.5% Debenture Stock maturity 2016

• Next key maturity is October/November 2016 when £156.5m of

debenture stock matures

• Spread across 38 borrower groups

• Immediately available liquidity (THFC Ltd. cash reserves plus

undrawn RCF) £23.5m

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Nom

inal (£

000's

)

16

THFC

11.5% Debenture Stock – exposures over £5mill

Borrower/

group

Nominal

amount

(000s)

Credit

Grade

Fixed charge

Asset cover (at

June 2016)

External

Rating/s

Places for People 19,500 3A 288% A+/A3

L&Q 16,000 2A 659% AA-/A1

Radian 10,500 2B 281% -/A1

Family Mosaic 10,100 1B 644% -/A1

ASRA Housing Group 7,250 3A 286% -/-

Black Country* 7,000 2A 229% -/-

Genesis 6,000 3A 377% -/Baa1

* Floating charge security with fixed charges also. Estimated MVT asset cover.

All 11.50% debenture stock borrowers reviewed and none gives any grounds

for concern.

17

THFC Debenture Stock maturity 2023

• After 2016 the next key maturity is October/November 2023 when

£189m of debenture stock matures

• Spread across 46 borrower groups

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Nom

inal (£

000's

)

18

THFC

AHF summary

19

THFC THFC/AHF Business Volumes

-

100

200

300

400

500

600

700

800

900

1,000

2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

£m

THFC EIB THFC Bond AHF EIB AHF Bond AHF Budgeted EIB AHF Bugeted Bond

‘AHF budgeted’ includes pipeline applications

20

THFC AHF – the most successful

Government Guarantee programme

• Loans signed and drawn £1.913Bn

• Loans signed but undrawn £0.298Bn

• 54 Borrower Groups to date (average loan size

larger than THFC)

• Progressing through credit and/or documentation

£0.391Bn

• Estimated Portfolio Total £2.602Bn - funded by

EIB facilities and long term bond issues

21

THFC Success of the Affordable Homes

Guarantee Scheme

22

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

£ m

illio

ns

AHF - priced fixed rate debt - cumulative amount and rates

AHF EIB FIXED - Amount priced (RHS)AHF BONDS - Amount priced (RHS)AHF BOND - all-in rateAHF EIB FIXED - all-in rateAHF FIXED - All-in RateAHF FIXED - saving achieved

THFC 2016/17 Business themes

• AHF bond and EIB issuance likely

to continue to calendar year end

• AHF second bond series likely to

approach £1Bbn. Application made

for repo eligibility with Bank of

England

• Further EIB activity much less likely

in wake of BREXIT

• Considering some THFC issuance

• Tempered risk appetite while

Government policy intentions

become clearer

• Opportunity to consolidate rapid

growth in portfolio

23

THFC

Sector Outlook

24

THFC

Could rebalancing of policy post BREXIT

represent an opportunity for HAs?

25

THFC Components of GDP

26

THFC From ‘Home Ownership trumps all’ to

‘domestic growth by any means’

• ONS reclassification

• Dec 2015 Spending Review focusses £4.1Bn grant programme

for shared ownership (back-loaded to 2020)

• Introduces LHA cap for HB payments in social housing by 2018

• March 2016 Welfare Reform and Work Act introduces 4x1%

Annual rent cuts for HAs

• Deregulation package designed to reverse ONS decision in

England

• Voluntary RTB (not much impact to date)

• HIST and LA high value asset sales (also not much impact)

• Introduces (but doesn’t switch on) Housing Administration

• 2016 Autumn Financial

Statement:

• Measures for domestic growth:

• Wider tenure mix

• Acceleration of grant?

• Guarantees Mk 2? 27

THFC English Housing Starts

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

160

170

180

190

200

210

220

230

240

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Ho

me

Sta

rts

Tho

usa

nd

s Annual Housing Starts

Private Enterprise

Housing Associations

Local Authorities

AllDwellings

Government annualised target

“On the subject of housing, the British are experts. Most people either own one or want to. And demand usually

grows by 200,000 units per year; each year only about 150,000 are built. Steadily rising house prices are the result of

this mismatch”. FT Lex 23 August 2016

HA starts don’t

Reflect all S106

28

THFC What does Deregulation Mean?

• 30 October 2015: ONS reclassifies

English RPs as Public Non-Financial

Corporations, listing:

• Control over disposals of housing

assets

• Direction over use of disposal

proceeds

• Powers over disposal of housing

stock following de-registration

• Powers over voluntary winding up of

RPs

• Power to appoint managers and

officers to an RP

NB not rent setting!

• Extended term of Chair to March 2018

Outcome of HCA Review imminent:

• Leading to a fully independent regulator?

29

THFC Markets & Competition

• Short term uncertainties around rent-cuts/policy

drove a s/t shift to private transactions

• Shorter term bank financing embeds more refinance

risk (selective opportunities for THFC?)

• Post BREXIT, HAs viewed by institutional investors

as a defensive investment

• In the short term, many developing HAs have been

strongly cash-generative

• Continued QE means HAs viewed as a value added

investment (witness demand for PfP unsecured)

• AHF has been the competition!

30

THFC Housing Association source of

new funding by financial year:

£Bn Source: HCA 8/16

Sector Snapshot at

June 2016:

£80.8Bn facilities

£66.3Bn drawn

£20.7Bn drawn capital

markets debt

Flows Stock

Source: HCA Quarterly Survey of Providers 6/16

And THFC data

31

THFC Markets & Competition

Minimum Spread

differential

now:0.67% from

average 0.71%

32

THFC HA Public Bond Issues Since May 2014

33

Term Spread Cost Moodys

(Years) over Gilts of funds BCA

AHF 208,000,000 AA/- May-14 28 0.37% 3.76%

Town and Country 80,000,000 A+/- Jul-14 31 1.35% 4.67%

Boston Mayflower 150,000,000 A+/- Sep-14 45 1.30% 4.30%

A2Dominion 150,000,000 -/-/AA- Sep-14 12 4.50%

Cross Keys 150,000,000 A+/- Sep-14 31 1.20% 4.30%

Walsall 250,000,000 -/A2 Oct-14 31 1.25% 4.28% baa1

Guinness 100,000,000 -/A1 Oct-14 30 1.30% 4.00% a3

Yorkshire 200,000,000 -/A2 Oct-14 30 1.35% 4.23% baa1

AHF 198,500,000 AA/- Oct-14 28 0.38% 3.30%

Wheatley 300,000,000 A+/- Nov-14 30 1.60% 4.40%

Herefordshire 120,000,000 -A2 Nov-14 35 1.38% 4.19% baa1

Riverside 250,000,000 -/Aa3 Nov-14 28 1.35% 4.00% A2

Paragon 250,000,000 -/A2 Jan-15 32 1.40% 3.63% A2

Richmond Housing Partnership 175,000,000 AA-/- Jan-15 30 avg life 1.17% 3.30%

Swan 250,000,000 A+/- Feb-15 33 1.30% 3.63%

AHF 194,000,000 AA/- Mar-15 27 0.32% 2.92%

Orbit 250,000,000 -/A1 Mar-15 30 1.15% 3.61% a3

GB Social Housing 16,800,000 A-/- Mar-15 24 2.00% 3.88%

AHF 208,000,000 AA/- Aug-15 28 0.40% 2.89%

Metropolitan 250,000,000 A+/- Sep-15 30 1.67% 4.20%

London & Quadrant 250,000,000 AA-/A1 Oct-15 34 1.35% 3.84% a3

AHF 194,000,000 AA/- Mar-16 28 0.43% 2.71%

London & Quadrant 300,000,000 AA-/A1 Mar-16 10 1.07% 2.63% a3

AHF 130,500,000 AA/- May-16 28 0.35% 2.62%

AHF 191,400,000 AA/- Aug-16 27 0.41% 1.99%

PfP Homes UNSECURED 400,000,000 A+/A3 Aug-16 10 2.25% 2.90% baa2

Rating Date

Issued

Nominal

Amount (£)

THFC Sector Risk – Key Areas of Impact

Rent cuts imposed in 7/15 budget have highlighted “political

risk”, impacted operating margins, but driven the search for

efficiencies.

Income risks from Universal Credit have been deferred due to

delayed roll-out, although “creeping” effect of benefit cuts.

Development risk 1 – move from S106 to in-house

development tests development competence. Potential

complication from the starter homes initiative.

Development risk 2 – build for affordable home ownership and

potential repetition of the problems seen in 2007/8/9.

Development risk 3 – build for sale exposes sector to new

risks, and cash-flow volatility.

Merger risks 34

THFC Sector Risk - recent experience

In the last 12 months, THFC/AHF has undertaken detailed due

diligence on more than 25 (English) associations. These analyses

have evidenced:

A willingness and ability to cut costs, from anything between 5%

and 10% of operating expenses (exc. depreciation).

Most associations have either reduced or maintained pre-budget

forecast development volumes. A small number of associations

have forecasted increased development.

In all cases, the additional developed units more than offset the

budget rent cut impact on income but at the expense of leverage.

A significant shift in tenure-mix, mostly towards shared-ownership,

but also outright sale to a lesser degree.

Bank lender covenants generally present no constraint. 35

THFC Sector Risk - Stress Tests

As part of our credit due diligence, we sight borrower’s stress testing

models, and sometimes request specific additional scenarios. Typical

stresses include:

An assumed extension of the 4 year rent cuts, or CPI flat in

perpetuity.

Interest rate increases well above OBR forecasts.

A “welfare reform” stress that sees bad debts/voids etc. double.

A house price fall of 20%-30% across the entire sales programme.

A sales delay, of typically 12 months above plan.

The usual outcome of stress testing is:

Little covenant stress in the first 5 years (often longer).

Funding usually adequate for at least 2-3 years.

Significant ability to curtail development expenditure.

Fall-back position of fixed asset sales, and/or converting sales units

to rental tenure.

KEY FEATURE – TIME TO ACT/MITIGATE.

36

THFC Conclusion

• THFC continues to deliver good earnings growth

• By end of financial 2016/17 (Sovereign guaranteed)

AHF portfolio will represent c 47% of Group loan

portfolio, driving significant sustainable growth in

Group operating income.

• Post BREXIT the policy environment for HAs possibly

more favourable. May present opportunities for

further guaranteed business.

• But heightened development risks for HAs.

• Continuing desire to shorten maturities by banks itself

presents an opportunity for selective growth.

• Institutional investment appetite positive in the wake

of more QE.

37

THFC

Questions

38

THFC

Appendix

39

THFC

40

The Housing Finance Corporation Limited (“THFC”)

Housing

Association

Housing

Association

Housing

Association

Housing

Association

Housing

Association

Housing

Association

Housing

Association

Housing

Association

Housing

Association

Housing

Association

Housing

Association

Housing

Association

THFC Funding No.2 PLC

(“THFC2”)

(Issuer Rating A+)

THFC Funding No.1 PLC

(“THFC 1”)

(Issuer Rating AA-)

THFC Funding No.3 PLC

(“THFC 3”)

(Issuer Rating A+)

Trustee/s in relation to

THFC

Debentures and Private

Placements

EIB and

other Banks

The Housing Finance Corporation

Limited — Structure Overview

Security — floating charge over THFC’s assets (secured loans)

All secured creditors are pari passu

Relationship between secured creditors regulated by Deed of Priority

Security – first fixed charges over specific residential properties

(or, initially, over cash)

£191m A+ (issued July 2009)

£72.25m A+ (tap March 2010)

£76.6m A+ (tap Jan 2011)

£31m A+ (tap March 2011)

£100m A+ (issued Oct 2011)

£131m A+ (issued Jan 2012)

£130.5m A+ (issued Apr

2012)

£67.6m AA- (issued Dec 2004)

£32m AA- (tap Dec 2006)

£37m AA- (tap March 2007)

£33m AA- (tap Dec 2007)

£80m AA- (tap Aug 2008)

Public stocks

11.50% stock due 2016

8.625% stock due 2023

9.625% stock due 2027

Plus PPs

Issued Bonds Issued Bonds Issued Bonds Issued Bonds Loans

THFC THFC Group Structure

T.H.F.C.

(Indexed)

Limited

T.H.F.C.

(Indexed 2)

Limited

T.H.F.C. (Services) Limited

T.H.F.C. (First

Variable)

Limited

T.H.F.C. (Social

Housing Finance)

Limited

T.H.F.C.

(Capital) Plc

UK Rents (Holdings)

Limited

UK Rents

(No.1) Plc

UK Rents

Trustee Limited

The Housing Finance Corporation Limited

Affordable Housing

Finance PLC

Principal debt

issuing entities

THFC THFC Management

Chief Executive

Piers Williamson

Credit and Risk

Director

David Stokes

Finance Director and

Company Secretary

Colin Burke

• Relationship Management

• Security Portfolio

Management

• Treasury and Portfolio

Management

Group Treasurer

Fenella Edge

Executive

Assistant

• Accounting and Finance

• Managed Companies –

Monitoring and

Reporting

• Company Secretarial

• Borrower risk

assessment

•Risk appetite

• Risk framework

•Credit grading models

42

THFC

Ian Peacock * Non Executive Chairman

Investment and merchant banker. Retiring Chair of

Family Mosaic Housing Group

Appointed 2013

Will Perry Assistant Director of Regulatory Strategy & Performance

HCA

Appointed 2014

Gill Payne * Director of Policy and External Affairs

National Housing Federation

Appointed 2014

Keith Exford

CBE

Chief Executive

Affinity Sutton Housing Group, Chair G15 (Large London

Housing Associations Group)

Appointed 2011

John Parker * Chartered Accountant, Vice Chairman Newbury Building

Society, former building society Chief Executive and

Chairman Building Societies Association

Appointed 2010

Deborah

Shackleton

CBE *

Former Chief Executive Riverside Housing Group,

Governor Liverpool John Moores University, Board

Member NHS Sefton

Appointed 2011

Charlie

Arbuthnot **

Ex-investment banker: Warburgs, Hambros & RBC

Capital Markets. Now housing consultant

Appointed 2008

* Member of THFC Credit Committee

** Chair of THFC Credit Committee

THFC Non Executive Board Members

43

THFC

THFC’s S&P Rating was lowered one ‘notch’ to A

Stable following the UK Sovereign downgrade in July

2016.

Prior to this, THFC’s rating had remained unchanged

at A+/Stable/A-1 since first obtained in 2004

Now classified as a Finance Company along with other companies

whose primary focus is lending to the public sector or lending to

government-supported borrowers

Rating potentially includes one notch ‘Government Related Entity’

uplift from SACP

Strengths Relatively strong franchise value

Strong support from the UK Government, which underpins borrower

creditworthiness

Robust collateralisation of loan book

Match-funded approach minimizes asset-liability risk

Weaknesses Modest liquid financial resources and low capital levels

Exposure to single sector, with borrower-concentration risk

Potential for conflicts of interest could arise from board composition and

responsibilities

Vulnerable to operational risk stemming from small staff numbers and key

personnel risk

THFC: Standard & Poor’s Rating

Major Rating Factors

44