Municipal bonds agency opens for business

25 Jan 16

The council-backed municipal bonds agency being formed to provide a new source of finance for local government is ready to put together its first issue once authorities approve its borrowing framework, senior figures have announced.

Sir Merrick Cockell, chair of the UK Municipal Bond Agency and chief executive Aidan Brady said a framework document setting out the working of the UK Municipal Bond Agency was now being distributed to councils.

Cockell, former chair of the Local Government Association, told Public Finance that once councils had approved these, the firm would start to develop the plans for the first issue.

“Councils at any time can have a need to borrow capital, so why not get the framework in place – in the constitution and your treasury management policies – then you can act when you need to. Do it now, get it there, add us to the list of organisations you can borrow to, whether it is in six months time or a year's time, they’ve already gone through that process.”

“We are ready to do business,” Brady added, and the agency would work to get the mix of borrower and bond volume in place ahead of a first issue, once its framework had been agreed.

More details on how the agency will work were also set out by Cockell and Brady as they confirmed the appointment of four key non-executive appointments to its board, including Barnsley Metropolitan Borough Council leader Sir Stephen Houghton as senior independent director. Derrick Anderson, former chief executive of Lambeth and Wolverhampton councils, and Mridul Hegde, a former director of public spending at the Treasury, were also among the appointments.

Authorities signing up to a bond will agree to a joint and several guarantee that would operate if a local authority defaulted on borrowing, Cockell confirmed.

This would ensure bond investors would receive their funds in the event of a default from other councils who have borrowed from the agency.
He said the guarantee represented a “final line of protection” for investors, but local authority financial planning and regulations mean “the sector is very secure”.

For authorities to sign up to the agency, they will need to pass the agency’s own credit checks, Brady stated, which will review the authority’s financial planning and involve discussions with local authority finance teams.

These are intended to mirror the checks carried out by credit rating agencies, with factors include whether authorities met statutory deadlines for publication of accounts, and if they have been qualified in any way, among areas considered.

Cockell added that the market for the agency to provide a source of borrowing for local government had been strengthened by the government’s recent devolution drive, which has seen the creation of city region combined authorities.
When we started up we thought it would be individual councils borrowing, but now we see combined authorities being formed and working out long-term financing agreements with government with a set income stream for 30 years,” he stated.

“Clearly then they have an income stream that they can borrow and fund significant capital borrowing against that, to fund transport schemes or whatever. So there’s another area of the market.”

He confirmed that 56 councils, as well as the LGA and the Greater Manchester Combined Authority, had signed up as shareholders in the UKMBA.

Shareholders would be charged less to borrow from the agency, which will issue bonds matched to local authority capital requirements and charge a small surcharge.

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