Danny Mather on loans to Housing Associations, bond issuance and financial innovation
0Danny Mather is corporate finance manager at Warrington Borough Council. He has held various roles in local government in Liverpool and Warrington for the last 23 years and currently focuses on treasury, the capital programme, financial planning, closure of accounts, VAT and finance issues in regeneration projects.
Room 151: Can you tell us about the loans Warrington has been making?
DM: What seems to be taking off at the moment is a scheme which we began small scale a few years ago. We gave loans to registered social providers of housing. At the time it was to Associations locally, roughly we have got about £16m-worth of loans currently on our books. Then at the beginning of the year we became conscious that both Santander and the Royal Bank of Scotland who traditionally gave loans to Housing Associations were pulling out of the market. Not because Housing Associations are high risk but because those banks were over-exposed in those areas.
We realised that long term lending was difficult to get hold of for some Housing Associations. We spoke to some of them and we have received several expressions of interest. So we hope to roll that scheme out in the near future. We are currently negotiating a number of large deals with several housing associations and are considering a bond issue to finance it.
Room 151: There was a lot of talk of local authorities doing bonds previously and then nothing happened.
DM: Yes, there was a lot of interest with the HRA situation last year but hopefully we will be the first local authority to actually take out a bond. We are currently negotiating deals worth potentially tens of millions.
Room 151: So the £16m out there at the moment is in small loans to Housing Associations?
DM: That’s right, they initially set up a facility, say of £10m for 25 years and they can draw that money down any time they want, £2m in two years time, another £2m in another two years time and so on.
There are two advantages to the authority, one is that we make money on the deal because we can borrow much more cheaply and pass a premium on. (The Housing Association gets the benefit because they are borrowing much more cheaply than they could from the bank.) Then another advantage to the council is that it stimulates housing in the borough.
Room 151: Where does the council get the money from?
DM: Up to now we have borrowed from the PWLB. We started about three years ago and wrote to the Secretary of State for approval, that took a few months and then they gave approval.
So if we were doing that deal today we’d be borrowing from the PWLB with their 20 basis points discount so at about 3.5%, then depending on the deal we negotiate a few percentage points on that. We have got to do it that way because legally and from an audit point of view we have got to show that we are not giving a soft loan; we have got to set a commercial rate and operate a commercial scheme.
Room 151: So going back to the bond, have you got a credit rating to do a bond issue?
DM: We are currently evaluating the option of getting one and are speaking to a number of authorities who have already gone through the process and achieved a credit rating. We will get basis points off if we go down the bond issuance route and have got the credit rating.
Room 151: Are you looking at issuing into the wholesale market?
DM: Yes, we have been talking to brokers and would issue to institutions. They’re quite confident that we would have a take-up.
Room 151: What sort of timescale are you looking at for the bond?
DM: Optimistically it could be about March/ April time next year, we’re at an advanced stage with the housing associations, it would obviously need approval from members as it is a lot of money to go and borrow. But we see it as a means of proactively using treasury to make money which we can invest in service delivery. We’re seeing treasury as a means of generating money because rates are very low at the moment.
At the moment it would be the first time a council has taken out a bond so we would issue one then if it was a success we’d consider the option to do another one.
Room 151: Do you have plans for any other schemes like this one?
DM: In terms of regeneration we are working on the concept that as regeneration schemes go ahead in the town, in order to keep the costs down and give value for money and savings for the council that we can use the money that we can borrow at low rates to give loans to developers for example, so that they could get the capital at rates much cheaper than they could get from the banks. The council would be covered because we would have covenants on the properties. We’re looking at developing that for the future.
Room 151: Can you tell us about the expansion of the Local Authorities Mortgage Scheme that Warrington is looking at?
DM: After the success of the LAMS that we have been running, we are working again with Sector who has formed a pilot group of about five authorities that we have met with. Sector are developing a product to do shared ownership.
At the moment it is being modelled on a 70:30 spread so an individual would purchase 70% of the property and the council own the other 30% that the individual would then pay rent on. The advantage of it is that it helps more people be able to afford property and over time most people who are in shared ownership would aspire to buy the other 30%. It means at the time of buying that people need a smaller deposit as well, so we see it as a means of helping people lower down the social order.
The original LAMS scheme is helping people that could afford mortgages in days gone by when you didn’t need a huge deposit, this is helping the next level down.
Room 151: Where will the council be getting the money for the thirty percents from?
DM: We are just putting our capital programme together for next year so subject to member approval we are putting £1m in the pot for next year. If it’s a big success we’d then invest more in it.
Room 151: You have a lot going on at the moment?
DM: Yes we continue to look at Invest to Save schemes and how we can use capital and treasury activities to generate savings for the council. A current idea we are working on is to borrow to pay off the council’s pension fund liability. We are applying to the Government for a Capital Directive and although this will be for a large amount of money the borrowing costs would be significantly less than the current cost paid to the pension fund.
Room 151: Where do the ideas come from for your finance department?
DM: It’s a combination of things. we do tend to come up with a lot of ideas and we have got a finance director who is very modern and open to new ideas. It’s probably the ideal time now because like most authorities we are making some very severe cuts. In the past I think a lot of authorities have been very risk averse when they were getting quite good settlements but now I think that treasury can be used to generate savings for the authority.
The options are now more appealing to members as councils begin to operate in a more commercial environment and embrace the freedoms offered under the localism act. Now we can borrow at such low rates that makes a perfect storm for us. If rates start going up we won’t have the same chance so we need to act quickly. Returns to the authority can be quite large and we need to start offsetting those returns. If we can make a few million on the treasury side we can use it to maintain services that we have been cutting back on over the last few years.