‘Strategic shift’ sees B&NES pay down debt

Bath and North East Somerset council has reduced its cash holdings by £50m to pay off debts.

The restructure sees LOBOs and PWLB debt reduced in the short term using cash reserves to allow the council to save up to £1.7m per year by paying less interest on its debts.

“We had £120m of debt,” says finance director Tim Richens. “£20m was in Lobos and £100m with the PWLB at an average rate of 4.5%. Taking money out of reserves, which have historically been high, was a big strategic shift for the council.”.

In the past cash balances have been around £100 to £120m. The council ran them down to around £80m as the low interest rate environment continued, and will now be left with what Richens calls an “operational minimum” of £30m.

The council received treasury advice from Arlingclose. “Using spare cash to repay debt is something that councils should always consider,” says client director David Green. The penalty for repaying loans before their scheduled maturity date can be spread over a number of years, he adds, and will usually be more than compensated for by a saving on interest.

“One reason not to repay loans is if the council expects to need to re-borrow the money in the next couple of years,” says Green. “The wide spread between PWLB repayment rates and new loan rates makes debt redemption an expensive exercise in this scenario. But where councils expect to have surplus cash for many years to come, early repayment of loans can be an easy saving.”

Large penalties on debt redemption with the PWLB have long been a thorn in local authorities’ sides. It is ridiculous, says Richens, that penalties must be incurred to swap fixed for variable rate debt, and also that local authorities can’t trade PWLB loans. “Another authority might want our loan: we should be able to pass it on to them and avoid a penalty, but the PWLB won’t let you do that,” he observes.

High cash levels reflect Bath and North East Somerset’s historic caution in investing. “We have made adjustments to our investment policies, like allowing AA- credit ratings instead of AA+,” says Richens. “But the fact that we were never in Iceland reflects the level of caution here.”