Arlingclose raises concerns over bond agency

Treasury adviser Arlingclose has voiced concerns over the details of a Local Government Association plan to create a municipal bonds agency.
Last month, the LGA announced that it had approved a revised business plan for the new agency, launching a “mobilisation” phase during which it will seek commitments from councils interested in investing and/or borrowing.
The plan said that the new agency could significantly undercut the borrowing rate offered by the Public Works Loan Board (PWLB), but Arlingclose, in a note to clients, said that this could, in turn, provoke a response from the Treasury.
According to the business plan the new agency can expect to borrow at 20 to 25 basis points below the current Public Works Loan Board certainty rate of 80 points above gilts.
But the Arlingclose letter said: “The response of HM Treasury on current PWLB policy remains unknown but history tells us that significant shifts in policy can and have occurred to ensure that the PWLB retains its unique position as the primary lender of choice.”
The treasury adviser also expressed a concern that the agency would not be able to gain enough support from councils, saying: “We remain less optimistic than the LGA on the future borrowing requirements of local authorities but acknowledge the merits and aims of the MBA.”
In addition, it said that borrowing councils would have to “consider carefully” the joint and several guarantee governance arrangements which would mean all borrowers covered the costs of a fellow council that defaulted on its obligations.
Finally, it said that taking an equity stake in the proposed agency at start-up would be a “high risk investment” for councils.
Speaking to Room151, David Whelan, managing director of local authority adviser Capita Asset Services, said: “We have these concerns as well, but also welcome the initiative as being a positive step towards potentially reducing the cost of borrowing for local authorities.”
Responding to the Arlingclose missive, Aidan Brady, lead adviser to the LGA on the scheme, said: “Arlingclose haven’t identified any risks to the project that we did not outline in our business case.
“Yes, it is a risk but the amount of money committed in the first stage is moderate. This isn’t a mad chase down a blind alley spending millions on day one on something that we are expecting to make huge returns on instantly. We are introducing it incrementally, taking a very cautious approach.”
He said that he hoped to know by the end of the summer whether there is enough demand from local authorities to proceed with plans to set up the agency.
A survey carried out already by the LGA indicated a requirement for more than £5 billion from 50 authorities which responded to its request for information, he said.
“If the agency is a success then there will be returns to equity investors and huge benefits to the local government sector from taking more control over its own funding.” The LGA hopes to launch an initial 20-30 year bond of £250 million by April next year.