By Richard Johnstone | 17 February 2014
Plans to create a municipal bond agency could require closer monitoring of local government by the Treasury to replicate the triple-A ratings received by similar agencies elsewhere, analysts at Moody’s have said.
Speaking to Public Finance, Moody’s vice president and senior analyst Roshana Arasaratnam, who has examined the plans, noted that successful local authority bond agencies in Scandinavian countries had clear accountability frameworks.
The Local Government Association has developed plans for a municipal agency in the UK, which would issue collective bonds and then lend money on to member authorities. It has signed up 18 authorities to help develop the plan, and last month appointed a panel of advisors to develop the business case.
The triple-A credit ratings of agencies, such as Kommunivest in Sweden, Munifin in Finland and Kommunalbanken in Norway, were due to their low risk and simple operating model, Arasaratnam told PF.
‘They’ve got very strong liquidity and the underlying asset quality of local government is strong, so we’ve seen no default in any of those sectors,’ she said.
‘There’s strong institutional frameworks for the regional and local government and strong monitoring by the sovereign as well. These are the characteristics that underpin their current triple-A ratings.’
Although it was not possible to comment on the possible UK municipal bonds agency until more details were announced, Arasaratnam said strong oversight would prove vital. In particular, there was close monitoring of weaker authorities by finance ministries in triple-A schemes.
‘What’s important in terms of support is actually the oversight from the sovereign and the relationship between the sovereign and the regional and local government sector,’ she said.
‘That’s key [to a top rating], and we layer on top of that the sovereign being able to step in and provide liquidity support, which – because of the strong ties between the sovereign these lending entities and the regional and local government – we see as strong.
‘I think we’d need to see what form that would look like for a proposal in the UK.’
Arasaratnam highlighted that housing associations had already expanded their use of bonds as the result of funding reductions, which illustrated the possible markets for local government.
‘The drivers have been the changes in funding, particularly the cut in capital grant [from government]. I think it’s also been due to timing, in terms of the attractiveness of the paper to investors, and their underlying credit worthiness.’
Mauro Crisafulli, Moody’s associate managing director, who has examined moves by local and regional government across Europe to issue bonds, told PF more municipalities were looking to capital markets as a result of government spending curbs and the impact of the financial crisis on other borrowing sources, such as bank lending.
This change has been ‘most dynamic’ in the UK, he added. ‘Traditionally [local authorities] relied on public sector funding from the Public Works Loan Board, but we see a new sector emerging with housing associations through the issue of bonds that they funded in the capital market. This the most important change that we have observed.’
