Treasury outflanks the City (again) as PWLB rate drops 20bps

Just when you though it was prudent to go back in to the bond market, or at least pitch up for a browse and run the numbers, the Chancellor’s budget has all but washed away any lingering hope in the City of a pickup in local authority bond issuance, for now at least.

Today’s Budget saw the announcement that: “The Government will introduce in 2012-13, a 20 basis points (bps) discount on loans from the Public Works Loan Board (PWLB) under the prudential borrowing regime for those principal local authorities providing improved information and transparency on their locally-determined long-term borrowing and associated capital spending plans.”

The move signals a clear statement of intent by the Treasury to keep local authority funds in-house and is tacit acknowledgement that last year’s rise to 1% over Gilts went too far.

Commenting on the announcement, Sterling Consultancy Services’ David Green said: “It’s obviously good news for local authorities, and reflects the Treasury’s worry that around 40% of local authority loans might have been sourced from the private sector if the margin had stayed at 100 basis points, causing a leakage of interest income away from the public sector. It looks like central government is deliberately trying to stop local government from issuing bonds.”

The news follows Danny Alexander’s announcement last September that there would be a one-off window of cheap borrowing from the PWLB for those with Housing Revenue Account obligations. A queue of local authorities called a shuddering halt to conversations they were having with the City at the time as cheap public borrowing was made available.

Investment bankers regrouped to compete with the post-HRA rate of 1% over Gilts only to see the Treasury outflank them for a second time in less than a year with today’s announcement.

The 20 bps discount however, appears to come at something of cost in that local authorities are required to meet various criteria to be eligible for the discount. David Green added: “many authorities will be bemused by the requirement to provide “information and transparency” on their expenditure and borrowing plans when they already publish their capital programmes and prudential indicators.”