LGA plans collective council bond agency

4 Nov 11

The Local Government Association will next month announce plans for a bond club arrangement that could allow councils to jointly borrow from financial markets.

By Richard Johnstone | 4 November 2011

The Local Government Association will next month announce plans for a bond club arrangement that could allow councils to borrow jointly from financial markets.



Speaking at CIPFA’s Treasury Management conference yesterday, the LGA’s programme director for finance said the association was looking at the potential for a collective agency to issue local government bonds representing all British councils.

Mark Luntley added that a proposal would be published in early December. It will outline whether the LGA would support such a scheme, and whether it could provide councils with cheaper borrowing than the Public Works Loan Board.

Luntley added that such ‘bulk purchase borrowing’ would be similar to schemes in France, New Zealand and some Scandinavian countries.

He told delegates that there was ‘a significant opportunity’ for councils to set up a collective agency that they controlled themselves. But he warned that ‘any business case must be robust’.

He added: ‘We are building that business case, and we will consult with the sector.’

Councils began to examine the potential of issuing bonds to raise the money they need to take on a proportion of council housing debt as part of reforms to the Housing Revenue Account system. The buy-out from central government will allow councils to hold on to council house rents that are currently pooled nationally. It was initially thought it would be cheaper to borrow using bonds after the Treasury raised PWLB interest rates in October 2010.

However, in September the government cut the PWLB interest rate for HRA borrowing from 1% above gilts to around 0.2%.

Despite this, some councils have continued with the process of becoming credit rated to allow them to issue bonds in the future.

Luntley said the LGA was examining a ‘number of different models’ for collective bond issues.

These include something similar to the existing Housing Finance Corporation, which makes loans to social landlords through bonds. The LGA is also looking as the possibility of issuing ‘retail bonds’, so individuals can buy council bonds.

The bond agency would take two to three years to set up, Luntley said. It could then issue bonds at regular intervals. Members could borrow from a central fund whenever they needed it, in a similar way to the current PWLB arrangements.

Luntley also called on the government to provide ‘policy stability’ in council borrowing, noting that the PWLB interest rate had changed twice since the coalition was formed.

‘If government, in its broadest terms, is not seen as being a reliable partner, we will not have people to deal with in the City. That’s a risk for this project if government keeps chopping and changing,’ he warned.

Also at the conference, the London Borough of Wandsworth announced that is was likely to announce its own credit rating next week. It would be the third council to obtain a rating since the government increased the interest rate for PWLB loans.

Birmingham City Council received its triple-A and AA+ ratings last month, and Lancashire County Council was yesterday given an Aa1 rating by Moody's – the second best rating.

Moody’s said Lancashire’s rating reflected ‘the very strong institutional framework governing the UK local authority sector’ and ‘a high likelihood of extraordinary support from the UK central government in case of need’.

Thomas Amenta, a senior vice president in Moody's sub-Sovereign group and the lead analyst for the rating, said that he believed that the £180m of government cuts to Lancashire in both the current and the next two financial years would ‘be challenging’. However, he added that the council's ‘track record of achieving the budgeted savings is encouraging’.



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