Sector’s David Whelan steps into Room151
0David Whelan is the Managing Director of Sector Treasury Services Ltd. He is a key advisor to local authorities on capital financing, investment management and proactive debt and risk management.
Room151: How has Sector’s offering changed since 2008 and the Icelandic banking crisis?
David Whelan: Sector has been providing treasury and capital financing advice to the public sector since the 1980s and over the last 12 months 400 clients have benefitted from this advice.
The events of 2008 have had a dramatic effect on the credit markets and the way in which investors now approach counterparty risk. Whilst attention was mainly focussed on the Icelandic Banks and their default, many other banks such as Depfa, Dexia, RBS and Lloyds all suffered major liquidity issues and had central bank bail-outs, without which they were technically insolvent. It is very clear that no one advisor at the time had a ‘crystal ball’ or a methodology which could predict with high degrees of accuracy that these events were likely to happen, otherwise all potential insolvent institutions would have been avoided by their clients, which evidence shows wasn’t the case.
As a result of these events, Sector undertook a major review of its approach to counterparty and credit risk management and, in 2009, further enhanced our sophisticated credit and counterparty risk management system. This enabled clients to identify and mitigate potential unacceptable levels of credit risk well in advance of negative credit events actually occurring. This approach has enabled clients to continue investing cash, despite the adverse credit market conditions, within their risk appetite and with a sound understanding of the credit risk involved, rather than to retreat into taking an overtly defensive approach which offered negative value in terms of the risk/reward relationship.
The quality of the service has been endorsed by the fact that over 400 public sector organisations now use this service, as well as some of the largest investment funds in the world.
Room151: Can referral fees and commissions from banks and brokers be consistent with independent treasury advice?
DW: Sector actively looks at providing advice to add value to our clients’ activities. Sometimes this advice involves utilising products/services which already exist in the marketplace and our role is to ensure we find the appropriate solution that delivers the best value to our clients. On some occasions, these services do not exist so we have to put a significant investment into designing the solution.
This can involve, in addition to Sector’s own costs, incurring expenses such as legal fees, state aid application fees, working with the relevant financial institutions’ credit committees to explain how local government finance works and why and how they should consider funding our client’s particular requirements at a reasonable funding rate etc.
In these instances we charge a fee to recoup the investment costs we have incurred in developing the solution. An example of this is the Local Authority Mortgage Scheme where we have been successful in setting up a national scheme which is supported by the CLG and the Council for Mortgage Lenders as well as a very large number of local authorities, in re-generating the private sector housing market. Sector’s fees are the same for all lenders and our fees are clearly set out in the 3-party contract which the Local Authority enters into.
A further example is the introduction of the only (non-bank) lender into the market providing an alternative to PWLB borrowing.
Transactional fees of this nature represent a very small part of the total income that Sector receives in any one year and only apply to those clients which take the relevant service, so it is important to keep this in perspective.
Our clients are always advised to test the market and choose the transaction which best suits their requirements and at no stage would be try to influence our clients to adopt a particular funding solution for our own monetary gain.
Room151: Treasury recently wrote to LAs about the PWLB certainty rate – what’s your reaction?
DW: This is a further exercise for local authorities to prove that their capital expenditure and funding plans are aligned and, as a reward, be entitled to apply for cheaper long term funding. The Treasury would appear to be applying greater momentum to the need to be seen as the main lender to local authorities, which is welcomed. We further expect that the PWLB premature redemption rates may be increased in due course.
Room151: Where does this leave other sources of borrowing such as single issuance bonds or the LGA’s collective bond scheme?
DW: One would have to question to what extent the bond markets will be able to offer value to local authorities in the future. PWLB rates are priced at lower spreads to the underlying gilt than any new LA bond issue could be which also has the cost of issuance (or costs for running a collective bond scheme) to take into consideration. Unless the Treasury change their approach again in terms of pricing and/or their role as the main lender to LAs, then we see no reason for LAs to consider using the bond markets in the future.
Room151: Are you seeing clients look for yield in ways they perhaps weren’t doing 6-12 months ago?
DW: Our clients have always chosen to optimise the yield available within acceptable risk parameters and subject to having sufficient liquidity. Our approach to counterparty and credit risk management allows them to do this in a controlled and measured way.
Room151: Besides the DMO, which counterparties concern you least these days?
DW: This is a moveable feast and it is too dangerous, in the absence of a dynamic and sophisticated approach to counterparty risk management, to set out a list of perceived ‘safe names’ with whom to place deposits. Placing a deposit with the DMO when there are Treasury bills available at higher net yields does not constitute good advice in my view, if a client is seeking UK Government risk.
Room151: Are you seeing new HRA debt create specific challenges for Council treasurers?
DW: The concept of running a 30 year HRA Business Plan is a new challenge for local authorities.This, in some instances ,may also challenge the culture of an organisation that has in the past not been able to set out long-term service plans because it was unsure to what extent Government funding would be available over the longer term. Managing the plan and ensuring there is appropriate communication between the housing and finance officers has proved difficult for some authorities.
Room151: Do you think Cipfa’s new risk toolkit represents a positive step for risk management at LAs?
DW: Risk is not a new concept to treasury management and CIPFA has recognised it in its Treasury Management Code. The toolkit is designed to enable the risk to be quantified. Sector has always provided a risk based approach to providing treasury advice but has been pragmatic in its approach recognising that any forecast of capital expenditure and cash flows beyond the period of the Medium Term Financial Plan is likely to be inaccurate. The HRA Business Plan now provides a more substantive base for long-term forecasting for the HRA and this is welcomed.
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The Local Authority Treasurers’ Investment Forum September 25th, 2012, London Stock Exchange
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