Council bond agency is ‘credit positive’, says Moody’s

15 Sep 14

Plans by the Local Government Association to create a municipal bond agency for UK councils is ‘credit positive’ and could improve financial oversight of town halls, ratings agency Moody’s has said.

By Richard Johnstone | 15 September 2014

Plans by the Local Government Association to create a municipal bond agency for UK councils is ‘credit positive’ and could improve financial oversight of town halls, ratings agency Moody’s has said.

Publishing its response to the confirmation of plans to form a company to issue the first bond next April, the rating firm said the agency would also diversify funding options and possibly reduce borrowing costs.

According to Moody’s analysis, currently around three-quarters of all UK local government borrowing comes from the Public Works Loan Board.

Following two changes to the rate charged on PWLB loans since October 2010, fluctuations in borrowing costs provided an incentive for local authorities to seek alternative sources of funding, the firm said.

The new agency will provide additional financial oversight through the planned processes for borrowing approval and supervision such as credit tests. In addition, the proposed joint and several guarantee from borrowers was likely to motivate peer monitoring of borrowing by members of the bond company.

The municipal bond agency was also likely to lower council borrowing costs by pooling funding needs and providing economies of scale.

Moody’s noted that the LGA had initially estimated borrowing rates through the agency of 70-80 basis points over gilts, with the intention of generating further savings over time. If these were found, it has been estimated authorities could save as much as £1.45bn over 30 years if they were to transfer half of the sector’s outstanding PWLB debt to the agency.

However, Moody’s added that the agency would need time to establish itself and deliver the planned savings.

 

Spacer

 

CIPFA logo

 

PF Jobsite logo

 

Did you enjoy this article?

AddToAny

Have your say

Top