Price and flexibility leave bonds on the back burner
0The debate rages on over local authority bond issuance.
The Local Government Association last week called for ‘infrastructure bonds’ to be backed by Government, noting that UK councils had better credit ratings than many sovereign states in Europe.
Birmingham, Cornwall, the Greater London Authority (and Transport for London), Guildford, Kensington & Chelsea, Lancashire, Wandsworth and Woking have all obtained highly competitive credit ratings putting them in a position to raise finance in the markets should they wish to.
The London Stock Exchange created the category for smaller issuers to seek bond investment from the public in 2011, with its Order book for Retail Bonds, and have since courted local authorities as a potential source of issuance.
However the current figures don’t appear to add up for councils who can borrow from the PWLB at 100bps over Gilts for non-HRA borrowing.
Paul Woods, head of finance for Newcastle City Council, summed up: “It all depends on cost: it’s very price-sensitive and at the moment there isn’t the financial benefit to do it.”
Other factors also come into play, said Woods, with the work involved in a bond issue, and their lack of flexibility: “My own personal view is that bonds aren’t particularly flexible and the PWLB is hugely flexible, I would rather have that than have a bond if there was any choice in the matter.”
Head of Arlingclose treasury consultancy Mark Horsfield questions the motives behind some of the publicity for retail bonds. “There are fantastic fees associated with them,” he commented. “If the PWLB was axed the market would look for the alternative but just two weeks ago the Treasury didn’t give any indication its days were numbered. It could make it a bit more onerous to get access to borrowing, but you’re not going to need to do a rating, an investors’ roadshow, appoint an underwriter and all of that stuff.”
Think Tank New Local Government Network recently interviewed finance officers and found, perhaps unsurprisingly, that they would consider retail bonds if they did not cost more than wholesale debt. One of the advantages of the retail bond, said the NLGN, is that it may target the local population as investors.
“Not only could retail bond issuance cut borrowing costs for councils,” said NLGN’s Joe Sturge but it could allow them to develop a more localist approach to finance. By targeting their bonds at local residents, a stronger link between citizen, council and infrastructure investment would be developed. Local people would take an active role in shaping the future of their communities while gaining access to a new, safe and accessible investment option.”
Meanwhile the LGA is holding off publicising its upcoming pooled bond idea until after the budget. The concept – of the Association setting up a collective bond agency for authorities to participate in – has been backed by the Treasury. The LGA has stated that it could make savings on the current PWLB interest rate.
Newcastle’s Woods is in favour too: “If you were issuing a bond you may want to go about it on a pooled basis,” he said, “but I don’t really see bonds being attractive at the moment.”
Appetite for the debate, though, is unlikely to wane.
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Anyone wishing to comment on the pricing of bonds, whether retail or wholesale, Vs the cost of borrowing from the PWLB are welcome to do so in the comments section.
