Wandsworth & Birmingham’s triple-A tips

The London Borough of Wandsworth is the latest in a growing line of UK local authorities who have obtained a credit rating in order to broaden their funding options. But while a rating would be desirable for many Section 151 Officers and their CEOs, the resources required to see the process through are often viewed as prohibitive.

Chris Buss, Wandsworth’s Head of Finance and the lead officer on their project was sympathetic to that position: “You need a couple of senior staff who are willing to spend a couple of weeks on it. It probably
took a month, in total, of senior officer time.”  Martin Easton, Senior Finance Manager of Birmingham City Council, who was also recently given a AAA rating, urged other authorities to seek senior level support and buy-in from the outset: “Authorities have to be prepared for top-level involvement. The finance director, the leader of the council or the finance portfolio member and probably a couple of other chief officers will all need to be part of the presentation to the rating agencies.

“The first thing to do is get that top-level buy-in before you start or you can go badly wrong” said Easton.

So once the political hurdles have been overcome and a local authority is committed to getting its creditworthiness rated, what comes next? “There’s quite a lot of work from the troops in the finance department and you’ll also need the support of a credit ratings adviser” explained Easton. Typically, this advice will come from an investment bank who, assuming your credit rating is a precursor to issuing debt, will be willing to roll their sleeves up and get involved in the early stages of the process. The rewards for
them are substantial if you get to the bond issue stage. Chris Buss was clear that the bank’s roll was very important: “Make sure you’ve got a good bank that is prepared to co-ordinate and deal directly with the ratings agency.

“We appointed two banks to deal with the bond issue, although we didn’t go ahead with it in the end, and one of those banks led for us on the ratings side. They did a very good job of pulling together the information we needed.”  Martin Easton and his team short-listed five banks before deciding on the relationship they were most comfortable with. The role of the bank/adviser, he added, “really is essential”.

The raw data for the application clearly has to come from the local authority but a bank will provide support in packaging the information up in a way the ratings agency is comfortable with. “They told us what we had to produce, we dug it out and they put in the right format”, said Buss.

The data required to apply for a rating can come from a variety of sources inside and outside of the authority. On the financial side, explained Buss: “It’s the sort of stuff that in the old days we’d have had to
do for the CPA or the CAA… it involved bringing together the last five years’ worth of accounts, our treasury management policy and various other accounting nuts and bolts. Had we overspent or underspent against budget in the last five years – that sort of thing.”

——————————————————————————————————————————————–
“If you’ve got any skeletons in the cupboard then be prepared to have them disclosed”
Chris Buss, Head of Finance, Wandsworth Borough Council
——————————————————————————————————————————————–

Both Wansdworth and Birmingham were asked to provide and interpret detailed information about their local economies – standard procedure in analysing sovereign and sub-sovereign credit. In Wandsworth’s case this required building a profile of the borough, a breakdown of the population, an assessment of economic activity and levels of employment. At this stage Chris Buss looked for support within the organisation: “This wasn’t the sort of information we’d readily have to hand in the finance department so we went to the policy unit and economic development people who presented to the ratings agencies”. According to Martin Easton the economic aspect of the application was “really (about) providing an interpretation of what the national statistics mean because the ratings agencies take most of their stuff from ONS statistics.”

Both Birmingham and Wandsworth were adamant that presenting well to the ratings agency was key. The amount of time, effort and resource that goes into acquiring the rating can all be put at risk if the presentations are not well prepared or come across poorly. For Easton, this was a pivotal part of the process: “You’ve got to impress at these sessions,” he said, “You’ve got to put your best foot forward.” So senior involvement at this stage as well a clear message of support for the project from within the authority are important in providing the right impression.

If the worse comes to the worst and you don’t get the rating you want, you’re under no obligation to have your rating published. You’ll still foot the bill, of course, but the adverse impact of a poor rating will be avoided. There are thought to be  a number of local authorities who obtained quasi-ratings for their PFI deals, for example, who opted not to publish the results.

The end game of the credit rating process is the savings you can potentially make in the bond market. It is assumed that an organisation with a higher credit rating is unlikely to default on its debt and that is
reflected in the yields payable on their bonds. Wansdworth and Birmingham were under no illusion that the implied support of the government contributed a good deal to their AAA ratings.  Both made the point, however, that there was still much to play for, even once you’ve taken implied support into consideration. “You probably get two notches of uplift to the rating on account of government support,” said Easton, “but that still means you’ve got to demonstrate the credit quality of the individual authority.” Going the extra
mile, and maintaining your rating, can make all the difference to the long-term profile of debt repayments and provide substantial savings.

So having been through the process now, what advice would Easton and Buss give to a Section 151 Officer about to embark on the same road?  Birmingham’s man reiterated the importance of senior buy-in: “As with all things, good planning is the most important thing …you can’t just do this as a technical thing in the back-office of finance – the organisation has got to buy into it.” Chris Buss on the other hand advised that openness was all important: “If you’ve got any skeletons in the cupboard then be prepared to have them disclosed – any contingent liabilities, old PFI deals, anything like that – you have to be transparent.”