How does Moody’s downgrade of the Co-op affect local authorities?
0by Mark Horsfield, director of Arlingclose Ltd
In general it should have a fairly limited impact from the investment of surplus funds because – from our perspective – it is an institution that has not been a feature of our advice as it did not meet our various credit indicators.
Whilst the Moody’s downgrades the week before last have grabbed the headlines it is worth noting that the the Fitch rating agency actually downgraded the Co-Operative Bank’s credit ratings in July 2012. Its long term rating was downgraded to BBB+ at that time and it retained a Rating Watch Negative (RWN) outlook largely as a consequence of a deterioration in asset quality resulting from its earlier acquisition of the Britannia Building Society.
It once again demonstrates how sentiment can shift and when a term deposit is made it must reflect a credit view over that term and Moody’s inflicted a six notch downgrade in the ratings taking it into sub-investment (or speculative/junk) grade territory. The Britannia acquisition remains at the core of these difficulties alongside some questionable management and costs associated with the failure of Project Verde (the acquisition of branches from Lloyds).
Is money in danger? Too early to say but what has to be recognised is that risk with term deposits with banks has gone up markedly of late as bail-in risk gathers pace. This means that bank difficulties will not automatically be cured by a dollop of public money. Moreover, investors (and particularly institutional investors) will provide assistance by way of what is known as a “haircut” or contribution from their funds held with the troubled institution. It is one of the reasons why we have been increasingly advising a strategic diversification away from term deposits with banks where possible.
The Co-Operative Bank has a significant share of the local authority banking market. Whilst we do not advise clients to invest in it we recognise that day-to-day treasury management operations can result in overnight or daylight banking, as opposed to investment, exposures to the bank. These are short-term by nature and we advise clients who do bank with the Co-op to maintain minimal exposures as always. We regularly collate data on the £8bn of cash collectively invested by our local authority clients and monitor where it is invested and on what basis. We also know who they bank with so discussed these various issues with clients last Friday morning.
If term investments are held with the Co-op then there is little that can be done as we are aware that the bank is not prepared to break and repay the monies deposited with it for an agreed term. I would be very surprised if any local authority would be looking to add any exposure to the Co-op and they will just run the term deposits off as they mature. The majority of exposure provides instant access or with some notice. I would envisage that these exposures have been or are in the process of being trimmed as we speak.
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The Local Authority Treasurers’ Investment Forum
September 19th, 2013
London Stock Exchange
Local authority delegates REGISTER free
