Borrowing strategies for HRA-day

The countdown to HRA-day is on, with March 23rd – the date for filing draft loan details – in just three weeks. Some finance departments have been working on dealing with the payment of the surplus to government for months, with the PWLB and internal borrowing being the main sources for the money.

Room 151 talked to several councils and to Arlingclose to build a picture of how councils are dealing with the emerging challenges and opportunities. 

Paul Jones, Head of Financial Services, Cheltenham Borough Council
We’ve been instrumental in lobbying for this so we’re not complaining about it; we’re taking it for the positives. In terms of the date itself, because of the preferential rates being offered by the PWLB, although we had looked at other sources, we will fully fund the settlement from the PWLB. We are gearing up to sorting that out on the 26th. We’ve got the permissions in place with the bank to ensure that we release the money on the 28th of March moving forward.

We do have some headroom between what we need and the cap on what we are allowed to borrow but we won’t be using that headroom at this stage. I wouldn’t say it is a large amount of debt compared to what we’re used to looking at. The settlement figure for Cheltenham is £27m. In terms of our debt profiling and the work that we had done before the settlement was announced, we were working on the proviso that it would be around £37m so we gave ourselves £10m headroom there.

We certainly see this as a favourable outcome for Cheltenham. There are some members that balk at the figure but I think that when you convert that figure with the borrowing that we already have and the mortgage on each property, I think it works out at less than £14,000 per property. If you or I were offered a mortgage around that value, we’d say yes please.

Barry Dawson, Head of Finance, Chesterfield Borough Council
This is massive compared to what we have had to deal with before. Our current level of debt is estimated at the end of this year – before the transfer – as about £30m so clearly taking on another £117m is a massive uplift. The maturities and rates are the part we are still working on. We haven’t yet reached a conclusion. We’re working with Sector, the treasury advisers. Most likely a lot of the debt will be structured as fairly long-dated so we don’t anticipate there will be a lot of daily or weekly activity on the loan portfolio because a lot of it will be determined well ahead. It’s more work but marginal.

Chris Buss, Head of Finance, London Borough of Wandsworth
We have the largest sum in the country, fortunately or unfortunately whichever way you want to look at it. We will be borrowing a substantial proportion of it from the PWLB. We were going to do our own bond, we got the rating, but then the PWLB reduced the rate to about 20 basis points over gilts and there was no way we could get a bond that cheap.

So we’re meeting the £434m from three different sources. About £250m is coming from a PWLB loan, probably over 14-15 years rather than the full period. That is because under our treasury management policy we aim to redeem debt as quickly as possible. That still gives us headroom to further borrow if we wish to during the life of the loan. If we didn’t want to do any other borrowing we could pay it back in 11 years.

For the rest we’re going to use a mixture of our own reserves. On the HRA and on the housing repairs account we have about £180m. We’re going to keep some of that back and the balance will come from internal borrowing from the general fund. How we’re going to work that general fund loan is on the 7.5 year gilt yield because under our treasury management policy we can invest in gilts. With the PWLB because the money that we are borrowing there is on an installments basis rather than a balloon payment at the end, effectively we would have borrowed that sum of money in 7.5 years (even though the actual duration is 15 years). Therefore, we are taking the 7.5 year gilt yield. That is actually slightly lower at present than the rate that we are going to be paying for the PWLB loan but higher than we can invest our money elsewhere for, so it is beneficial for both the Housing Revenue Account and for the general fund.

We did look at borrowing more from the PWLB because the council has got ideas to do some fairly major works on some of our housing estates but they are going to take two to three years to come to fruition and the cost of carry on that even at the preferential rate is fairly significant. Instead we have extended the life of the PWLB loan that we would have got from 11 to 15 years, and that has cost us an extra £15m in interest but that gives the capacity within the HRA to borrow that funding should they do the work, so we’d only borrow it if they made that decision and we don’t have to pay the higher rate.

The 23rd is a Friday and the 26th a Monday, it is subject to nothing catastrophic happening over that weekend and the same would have been the case if we had gone for a bond – it’s the rate available on the day, the premium on gilts on the day. You have to take what the market gives you. We could have done some form of hedging but we are very cautious about that sort of thing.

Paul Reddaway, Head of Finance, Treasury and Pensions, London Borough of Enfield
We have to borrow £30m from the PWLB. We see that that will present opportunities for potential debt restructuring between the HRA and the general fund. That gives us a bit more flexibility and helps us use some of our treasury management skills there. It has been unusual in that we haven’t really worked on a 30-year business plan before. It’s a concept that we have struggled to come to terms with because we have only worked on five year plans before. Having this ambitious 30-year plan changes your horizons.

David Blake, Client Director, Arlingclose
We’ve got about 35 local authorities that are going through the HRA process so we are working with those on funding strategy and some of those are having debt repaid as well. Councils will have the risk in terms of managing the treasury side but I think a lot of them will go for fixed interest debt that is fairly long dated. We’ve got historic lows in terms of gilt yields and we’ve got low margins on that day relative to where regular levels are so it points to securing quite a lot of long term, low rate cash.

Some will want to balance that with a bit of debt which gives them flexibility on repayment so there will be a mixture. We are advising portfolios on a mixture of returns and maturity dates but with a bias toward longer term funding. But I think they are quite excited about the opportunities that the reform process will bring. I think that council members are now getting their teeth into looking at whether this is going to generate a surplus that they can build with. They’re talking about internet cafes in housing blocks, newbuilds, and they’re looking forward to getting on and doing it.

Previously the inference had been that local authorities could start borrowing this money in January through to the end of March to spread the interest rate risk. That would have meant borrowing early and having the money on deposit. I think the treasury took a look at the state that banks are in and thought they’d rather not have £13billion out on the market over the period so they reduced the window of activity down from three months to just one day.

What would make the payment simpler would be if there was a direct tie-up between the PWLB and central government. It’d be much easier if the PWLB made the payment over to the CLG, cut out the local government part of the transaction and informed the local authority this is your debt, this is your interest risk and there’s no in-and-out transaction, no transaction risk and all the stuff that could go wrong: computer failure, internet failure, a problem with banking limits etc. All these issues are the problems that the local authorities are having to address for the settlement of the transaction.

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