The two Sues of Guildford DC

Guilford District Council recent became the only AAA rated District Council in the country. Behind that accolade, amongst others, were Sue Sturgeon, Guildford’s Strategic Director and Section 151 Officer and Sue Reekie, Head of Finance. They spoke to Room151 about ratings, £193m of new debt and plans for their treasury investment strategy.

Room151: Why did you decide to have your credit rated after the PWLB interest rate went back down for HRA debt?

Sue Sturgeon: We did pause at that stage and think, well, do we want to do this? So we went back to
our original reasons for doing it which were not only about the housing debt but rather about giving us more flexibility in the future and about how we might take on money if we need to do any regeneration in the town. We believed we would need that flexibility if we chose to borrow.

R151: What advice would you give any other council who were about to get their credit rated?

Sue Reekie: Well the first thing we did was appoint Barclays to help us with the process. Not only was it something we hadn’t done before but there weren’t many other local authorities who’d been through the process either, that we could go to for advice. It actually worked remarkably smoothly. The focus was wider than we originally thought it would be – it didn’t focus as much on the treasury management side as we thought but involved officers from departments across the council. Barclays were very supportive throughout and I’m sure it would have been far more onerous without their help.

SS: The process is very rigorous and the evidence we finally presented to Moody’s was about an inch and a half thick of A4 paper. It covered the council’s constitutional arrangements, details of our councillors, procurement processes, the demographics of Guildford, the strength of our financial delivery, diversity of income streams…It was a very wide ranging and interrogative piece of work and an extremely useful process in itself. Both Sue and I had to work very hard in the build-up to the presentation to demonstrate
the financial credibility of the council. The presentation itself was around four hours of quite intensive questioning involving myself, Sue Reekie, David Hill – our Chief Executive – and Cllr Sarah Creedy, who is responsible for the housing portfolio.

R151: What regeneration projects do you have in the pipeline?

SS: We’re looking at the regeneration of a particular part of Guildford and looking to attract a bigger retail offer. We’re in talks with the company that owns the leasehold on one of the centres we’re interested in. That’s as much as we can say at this stage really but regeneration is one of the council’s top priorities.

R151: What are the implications of the HRA buyout for debt management and how do you intend to manage them?

SS: We’re pretty much a debt free authority and have been very successful in the investment of our funds and are very proud of that record. Now we’re having to take on a huge debt – in our case £193m – and it’s a size of debt that none of us have ever really had to manage before in our careers. So we’re looking at ways to manage it. We’re using Arlingclose as our advisers and we’re very pleased with the advice they’ve given us. PWLB are a natural option (for borrowing) but you have a window of one day (March 26^th, 2012) to take up the HRA money and yet you’re building a business plan for 30 years. We need to think about how we’re borrowing: are we borrowing short, long, fixed, variable, for example?

SR: It is unfortunate that we’ll have to take all the money we want from the PWLB on that one day whereas previously we would have been able to see what happened from January through to March, build some model portfolios, and see how rates behaved over that period. Now we’ll have to look at the rates on the day take a view there and then. Going forward we’ll have to learn quickly: we don’t have a lot of experience in managing debt but we have managed our investments very well in the past and plan to so the same with the debt over the next 30 years.

R151: Turning to investments, you identify the investment of your capital in your treasury management strategy as an important source of income for the council. How have you tried to maximise that income?

SR: Our first objective is security and that underpins everything we do. Secondly, we make sure we can get our investments back at short notice. After that we have to make the money work for us as best we can and the way we do that is by being active and looking for investments other than the DMO and
the banks.  We have some investments with the EIB (European Investment Bank), the NIB (Nordic Investment Bank) and also the Investec Target Return Fund although that is only a small part of our
portfolio. For us, diversification is as good a way of managing our risk as putting it all with the DMO.

R151: Do you plan to increase your allocation to non-specified investments?

SR: At the moment we’ve got no plans to move away from the sort of thing we’ve been doing. Actually, we’re considering not taking all of the £193m HRA debt on because finding good counterparties at the minute is quite difficult. Instead we might do some disinvesting and use some of our cash reserves to the pay the government.

SS: Taking up Sue’s point, decisions we make on March 26^th and the following month will impact our business plan for the next 30 years so it’s a very important issue and I think it will change the nature of how we’ll manage our housing service. In the past we’ve had some autonomy but not a huge amount because large chunks of your money went straight to the government. It brings a new dynamic to our jobs.

R151: How much of the HRA debt do you expect to borrow?

SS: I expect we’ll borrow around £170m but we haven’t come to a decision on that. Maybe a little more. We are a council that has a very high level of assets in terms of property ownership and we’ve recently sold a couple of bits of land so we’re looking at using some of that money too, instead of borrowing it all at this stage.

R151: How has S&P’s recent rating review and new methodology affected you?

SR: Most of the banks that Standard & Poor’s looked at were off our counterparty list already because of the downgrading Moody’s did back in October and none of the banks have gone down below our acceptable minimum ratings level. So that won’t have an immediate impact on us but obviously the fact that we have so few banks left on our list does mean we’ll have to think very carefully about our treasury management strategy for next year. We need to think about what level we set the bar at and what other factors do we need to take in to account.

R151: Presumably, local authorities will need to lower that bar or run out of counterparties?

SS: I think that’s the point. When the banks were downrated we called an emergency meeting of our Treasury Management Panel and we were satisfied that actually, the banks aren’t any greater risk than they were three, four weeks ago. So I think you have to be realistic and lower the bar slightly.

R151: Finally, on the new general power of competence, do you think that will have much impact on treasury?

SR: There’s a debate around whether the general power of competence gives you the ability to start using derivatives and I think there’s still a big question over that. Just because the new power is there it doesn’t
mean we have the legal authority to dive in and start using derivatives and I think that debate will run for some time yet.

SS: Personally I don’t think it is going to have much effect on treasury. I think one of the strengths of Guildford that Moody’s recognised was our diverse income stream, for example the strong property portfolio I mentioned earlier, including industrial estates and town centre sites. That’s the area that we’ll probably expand – looking for real investment opportunities – but we don’t really need the general power of competence for that anyway. I don’t think we’re going to be doing any more innovative treasury management just doing more of what we do anyway.