Councils plan to issue bonds despite PWLB rate cuts

28 Sep 11

Councils are pressing ahead with plans to borrow through the bond market for the first time in more than two decades, despite the cut in public borrowing interest rates, Public Finance has been told.

By Richard Johnstone | 28 September 2011

Councils are pressing ahead with plans to borrow through the bond market for the first time in more than two decades, despite the cut in public borrowing interest rates, Public Finance has been told.

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Authorities had been planning to issue bonds to fund the changes to the Housing Revenue Account system, which will give them control of their council house rents. Around 135 councils are expected to have to make a one-off payment to the government to buy out the current system.

But the bond plans were put on hold when Chief Secretary to the Treasury Danny Alexander announced last week that the government would reduce the rate of borrowing from the Public Works Loan Board to finance the HRA buy-out. The rates are to be cut from 1 percentage point above government gilt rates to 0.2 percentage points.

Despite this, council bond issues remain ‘on the agenda’ for the ‘back half of next year’, said Chris Hearn, head of local authorities and education at Barclays Corporate bank. This is because the PWLB rate will remain at the higher level for all non-HRA related borrowing,

Hearn has been working with six authorities on possible bond issues and said they still plan to get credit ratings, the first step towards issuing bonds, later this year.

‘It’s still very much on the cards. Do I believe there will be some bonds issued in this sector? Definitely. 

‘Large authorities may lead that way, and we should see some ratings being published later this year or early next. Local authorities now understand how the market works.’

One possible way that local authorities could borrow is to join together to form bond clubs, which would jointly seek to borrow for a number of projects in one funding round.

Hearn said that this is ‘very likely’ to be the first example of bond issues.

‘All local authorities have short‑term needs, and we are talking about the club solution. It’s seen as the most credible way for £10m–£15m borrowing requirements.’

Tom Symons, a researcher with the New Local Government Network, said that he expected to see bond-market borrowing from councils in the next four years, with a handful taking place over the first two years.

He also said that club bonds were ‘more likely’, but added that authorities might ‘wait a bit for the market turbulence to calm down’ in the next 12 to 18 months. More authorities will go to market by the end of this Parliament, he added.

The Local Government Association said that it was ‘still looking at the feasibility of councils issuing their own bonds to raise funds for public works’.

A spokesman told PF: ‘The need to do this in relation to HRA transfer has diminished due to the lower lending rate… but the overall lending rate from the PLWB hasn’t fallen and, as such, bonds may well be a viable option to raise funds at a lower rate.’

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