Town halls face credit test to borrow from bonds agency

29 May 14

Councils will have to pass a credit test and cross-guarantee loans made to other authorities if they want to access the Local Government Association’s planned municipal bonds agency, the lead adviser on the project has said.

By Richard Johnstone | 29 May 2014

Councils will have to pass a credit test and cross-guarantee loans made to other authorities if they want to access the Local Government Association’s planned municipal bonds agency, the lead adviser on the project has said.

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Speaking to Public Finance about the development of the agency, Aidan Brady said there had been interest from all types of councils to sign up to the scheme since approval of the business case in March.

He has been assessing interest from town halls in the ‘mobilisation phase’ of setting up the agency, which would issue bonds and then lend the money to councils as a rival to the Public Works Loans Board.

Councils will be asked for a final decision on backing the scheme in June, with those that want to join having to pass a credit test, he said.

‘The agency needs to make sure that it is not in an adverse selection situation, where weak local authorities come to borrow money from us,’ he said. ‘So the agency will have credit processes, and that credit process will endeavour to make sure the agency only lends to strong credits in the first place.’

This would also provide assurance to the town halls that would be expected to sign a joint and several guarantee – by which councils provide collective backing of their fellow borrowers’ obligations.

Brady said the decision to include the joint and several guarantee in the business case, which had not previously been a key part of the plans, would provide cheaper borrowing.

Currently, the Public Works Loan Board charges most councils 80 basis points over government gilts for loans. The LGA’s business case stated the bonds agency could cut this rate by as much as 10 points without the guarantee, but the reduction could be by as much as 30 basis points with it – saving more than £9m on a £100m loan over 30 years.

‘I put it out there, and the finance officer group that was supporting the business case proposal and the political group all agreed the joint and several proposal was too compelling to not adopt,’ Brady said.

‘We thought the agency could deliver some savings without the joint and several guarantee, but with that it became very compelling for all the people who are engaged in the process.’

Brady said it was likely that if councils were not willing to sign up to the guarantee ‘at this immediate point in time it would exclude them from the agency’.

He said: ‘My instinct is that, if an authority doesn’t want to sign a joint and several guarantee, then the agency would not be available to them.’

A first issue is expected in the second quarter of next year.

 

This article was first published in the June edition of Public Finance magazine

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