U.K. social housing securitizations have, up to now, enjoyed exemption from administration risk - where a third party suspends control of a company if its solvency become questionable. Because the social housing deals were believed to be exempt from administration risk, several of these transactions have been outstanding for a number of years. However, recent court cases tried under the new European Union insolvency legislation may threaten their special status.

Up until now, housing associations fell under the status of Industrial and Provident societies, which are not exposed, to administration. Recent U.K. high court cases have highlighted that under the new EU regulation, administration proceedings can now extend to unregistered companies.

According to analysts from Moody's Investors Service, U.K. housing associations may fall under this umbrella. Unless this risk is addressed, some outstanding housing association deals could face downgrades primarily because administration would change the probability of default and expected losses. Although administration does not necessarily affect bondholder security, it could disrupt the cash flows and timing of cash flows as well as the value of the security, Moody's said.

Among those listed with potential exposure are the Haven Funding PLC and Haven Funding (32) PLC, both rated Aa3'; Housing Association Funding PLC rated Aaa'; RSL Finance 1 PLC rated Aa3'; Sanctuary Housing Association rated Aa2'; and UK Rents rated Aaa'.

On a more optimistic note, steps are being taken to properly address the legal status of these social housing associations. Going forward, deals will be structured to provide transactions with the appropriate exemptions. A number of housing association transactions maintain structural provisions that shield them from administrative exposure. They either carry a financial guarantee or maintain a rating that falls in line with the underlying rating of the housing association, explained Moody's, adding that transactions where the borrower is filed as a registered company, the "issuer holds a floating charge for the appointment of an administrative receiver." (See ASR 12/2/2002).


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