By Richard Johnstone | 2 December 2013
Councils have been warned they will need to set out details of their long-term borrowing plans if a proposed municipal bonds agency is to successfully provide town halls with cheaper finance.
Financial experts have told Public Finance that authorities would need to set out borrowing needs for as much as four years into the future to ensure the Local Government Association’s proposal, announced last month, is attractive to investors.
The LGA confirmed plans on November 22 to create the agency, which would issue collective municipal bonds and then loan the money raised on to authorities. LGA chair Sir Merrick Cockell said a council borrowing £100m for 20 years could save as much as £4.7m compared to the existing Public Works Loan Board rates, and 18 councils have signed up to develop the scheme.
However, experts warned that the new agency – and councils themselves – would need to set out likely borrowing for years in the future to ensure current PWLB interest rates could be beaten. The headline rate for PWLB loans is 100 basis points over the interest rate on government gilts.
Matt Thomas, the director in debt capital markets at Barclays Corporate, who has followed the agency’s development, said town halls could access cheaper borrowing than the PWLB through the bond market. Transport for London is already able to do this, he suggested.
However, this has been the result of TfL producing a long-term funding plan, so investors know when bonds are going to be issued. To ensure the municipal agency can borrow at interest rates cheaper than the PWLB, there would need to be a council borrowing programme set out for at least four years, he said.
‘Individual councils have struggled in the past to get competitive [interest rate] pricing on bonds because investors knew it would only be one issue every ten years, which is not attractive,’ he added.
‘If the agency can say that it has £1bn to do over four years, as a group of councils, then it becomes much more like TfL [in volume] – people can see it is worth them focusing on and worth them buying the bonds because they will be tradable.
‘It’s clear that what the LGA is trying to do is get as much below gilts plus 100 basis points level of the PWLB as possible. If they say that it’s a small deal size and we can’t guarantee when we’ll be back, then those basis points drift away.’
Fraser Mackay, Barclays Corporate’s head of local authorities, added that individual councils would need to set out their plans for the borrowing to reassure investors.
‘I think that planning is going to be essential, as much to reassure investors that the money they are putting in is going to the right cause [and] it’s not just going into nowhere.
‘You need to make sure you are able to demonstrate to investors what the money is for. And the stronger your story, the more appetite there will be for investors and more demand, which in turn would push the price further down.’
Nick Proud, the senior managing director of Assured Guaranty – a firm that provides guarantees for bond issues to cover against risk of non-payment – agreed that information about the programme would be vital.
His company provided a guarantee for a bond issue backed by Leeds City Council in July to fund a Private Finance Initiative regeneration project, and Proud said there would be an appetite for municipal bonds.
However, he told PF: ‘Institutional investors will want to know they are going to see a decent deal flow and how often they are going to come to market.’
George Graham, the deputy county treasurer at Lancashire County Council who has been involved in the agency’s development with the LGA, said a long-term borrowing programme would be set out.
‘That’s why the agency works,’ he said. ‘As it becomes a source of funding for a portion of local government funding, there will be a series of bond issues from the agency, a consistent flow of bonds coming into the market. You have got to create the market, we accept that.’
A four-year plan was likely. ‘I would think they’re looking at something like that. There needs to be discussion with local authorities that are signing up in the first stage to ask what they would be looking for from the agency in that period of time.’
This would require greater planning of spending as part of a commitment to the agency by councils, he added. ‘That is not necessarily a bad thing because it contributes to better capital expenditure planning and capital expenditure management, which is something that we ought to be doing anyway.’
