Treasurer’s reflections – Q1: HRA & Counterparties

Q1 was a busy and turbulent time for local authority treasurers as they took on HRA debt, digested the budget and the PWLB rate change and continued to look for eligible counterparties and safe investment opportunities against the backdrop of the Eurozone crisis. To kick off a new, regular feature, we’ve asked  Mark Finnegan, Rugby Borough Council’s Principal Accountant, to reflect on the last three months. If you’d like to contribute in Q2 – please email editor@room151.co.uk 

The dominant event in Q1 was the HRA self-financing settlement payment. Rugby Borough Council’s final debt allocation was £72.949m. We spent some considerable time and effort examining debt financing solutions prior to the PWLB rate change including regional and national bond issues, but, in the end, there was no counterparty who could compete with the one-off self-financing rates. Nonetheless the knowledge acquired and contacts made will hopefully stand us in good stead for the future. Once the PWLB option had been decided on we then considered a variety of debt models, finally settling upon a mixture of internal borrowing/PWLB and maturity structures following the HRA cash surplus over the term of the business plan.

Authorities had expressed much anxiety in advance of the 28th March about the size and complexity of the transactions taking place ‘on the day’ but RBC’s experience was pretty seamless – website access, banking, document notification, all went to plan. Although the transaction was by far the largest ever undertaken by this authority, it marks the end of the beginning in self-financing terms – the challenges to come will involve revising business plans and looking at what treasury management can do to enhance those plans, whether in undertaking additional borrowing or restructuring debt.

Whilst the HRA transaction was denoted by a specified end point and some uncertainty as to how it would be achieved, investing during Q1 was far more straightforward – liquid deposits with highly rated counterparties – in the case of RBC, a range of AAA rated Money Market Funds. All the credit risk triggers in the latter half of 2011 (credit ratings, CDS prices, etc) made it inadvisable to look for a yield gain across longer maturities. It was interesting to see the ‘calming’ effect that ECB intervention had on markets during Q1 but it remains unclear in the near to medium term whether this is merely a sticking plaster for a problem that threatens to re-appear at intervals for some time to come. In the meantime RBC set its investment policy to give sufficient scope to participate with a range of counterparties during 2011/12 but will keep a watching brief on market conditions before committing to longer term investments.