LGA to press ahead with revised bond agency plan

The Local Government Association has decided to move forward with its plans for a local government bond agency, after a meeting of its executive yesterday afternoon.
Paul Raynes, the LGA’s head of programmes, told Room 151 that the meeting examined a revised business case, and found that it was “persuasive”.
The LGA will now embark on a “mobilisation phase”, approaching councils to seek firm commitments to join the new agency.
Sir Merrick Cockell, chairman of the LGA, said: “This is a great low risk opportunity for local authority and other pension funds to support investment in UK infrastructure, while receiving a better rate of return than from gilts.
“The huge potential for reducing local government’s borrowing bill by introducing diversity and a council-owned competitor into our lending market is too big to ignore.”
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.
The low borrowing rate would be achieved in large part due to the adoption of a “joint and several liability” structure for the company, where all members would be responsible for any other that defaulted on repayments.
Raynes said this could help the agency achieve a high enough credit rating to bring the cost of borrowing down to the required level.
Some in local government have raised concerns about whether such an arrangement would be acceptable to all councils, but Raynes said that the business plan includes six layers of protection to mitigate the effects of any joint liability.
The business case has also changed the operating model of the agency from its originally-planned subordinated debt structure to one based on equity.
Raynes said that the LGA is looking to raise between £8 million and £10 million in equity from councils to launch the vehicle, but that their individual contributions would vary depending on their size and appetite.
The business case said that, if half of the outstanding debt with the PWLB was transferred to the agency, the saving to the local government purse could be between £1.2 billion and £1.45 billion over 30 years.
The business case was revised following the appointment in January of Aidan Brady, a chartered accountant who has worked in senior roles at banks including Deutsche Bank UK, as lead advisor on the project.