CIPFA Conference Goes Big On Bonds

Delegates attending today’s CIPFA Treasury Management Seminar at RBS’s Bishopsgate conference centre will be sure of one thing: bonds are definitely not off the agenda.

Certainly something of a dampener was put on the idea of local authority (LA) bond issuance in September when the PWLB dropped its lending rate for the buy-out of the Housing Revenue Account (HRA). A number of LAs were busy crunching the numbers prior to the PWLB’s announcement and had calculated that there were around 20bps of savings to be made in the bond market if the PWLB’s rate was to remain at 1% over gilts. It wasn’t, not for HRA finance at least, and the crunching ground to a halt.

Today’s conference will have certainly re-opened the discussion, however, and it seems that both local authorities and the City are looking beyond HRA loans at financing other projects via the markets. The Local Government Association’s (LGA) Mark Luntley, part of a working group exploring the business case for various types of bonds, commented that in the current situation LAs are “very dependent on one source of finance”.

Luntley made clear that the LGA were just looking, at this stage, at the business case for various bond structures but expressed a personal liking for retail bonds, where LAs would borrow from private savers. He questioned, however, the likelihood of a viable pricing model for a retail offering. Other options being explored by the LGA include both single authority and joint authority issues in the institutional market.

The single issue bond appears to be on the radar for some of the bigger LAs where a public issue needs to be upwards of £200m in size and come with a credit rating from one or more of the ratings agencies. With Birmingham having recently been assigned a AAA-rating and Wandsworth days away from announcing their rating, there are at least a couple of local authorities investing in the tools to go down the single issue route.

Manchester City Council’s Richard Paver, also speaking at the conference, was, on the other hand, underwhelmed by offers to borrow at 80bps over gilts in the bond market and has instead recently secured financing for 30-year-money from the European Investment Bank (EIB), for £450m, to finance tram developments at preferable rates.

The most viable structure, at least for the vast majority of LAs, will be the joint or aggregate bond issuance where separate institutions borrow collectively in one vehicle. Although the joint issue presents a number
of challenges and restrictions surrounding timing and cross-guarantees, the sum required by a LA to join such a scheme is well below that of the single issue. So will the research herald the launch of an LGA backed collective bond scheme? The association was certainly supportive of CCLA’s recently launched Public Sector Deposit Fund, committing £10m to the fund, which was designed to harness the collective clout of LAs. Probably a good indicator!

M&G’s Rob Marshall, presenting the investor’s perspective said he was “not expecting a surge of issuance in the market” but felt that investors would look favourably upon an LA joint issues because of
the “similarities underpinning the credit profiles” of the joint issuers and the “implied support” of the government. He cautioned though that LAs had been out the market for some time and would need to brush up on their market savvy. “Education goes a long way towards improving issuance levels” he said.