Bonds agency on verge of first bond launch

The UK Municipal Bonds Agency is poised to launch its long-awaited first bond within weeks, with a second issue set to follow before the end of the financial year.

Councillor Richard Watts, chair of the Local Government Association resources board, revealed the news this week at his organisation’s annual local government finance conference in London.

3rd LATIF NORTH
March 25th, 2020, Manchester
Council treasury investment & borrowing

Room151 understands that the inaugural bond will involve just one local authority, with the second involving a group of authorities.

Speaking to the conference, Watts said: “The agency has recently redesigned [its] lending offerings councils and removed the simple and irrevocable guarantee element to ensure the offer fully meets the council’s requirements.

“They are now working on two bond issues, both scheduled to be completed within the current financial year.”

Sources close to the deal say that the first issue is likely to be worth more than £100m, have a duration of around 12 years, and will involve a large local authority.

The UKMBA is understood to be confident that the rates at which both bonds will be issued will comfortably beat the current rate for Public Works Loan Board (PWLB) loans.

It is understood that the council involved in the first bond will use the cash to support a number of projects within its capital programme.

It is understood that banks have already started a soft marketing exercise to attract interest in the bond among investors.

In order to complete the deal, the council involved will need to either already have a rating agency rating, or gain one before the bond is launched.

If and when the bond is issued, it will be the culmination of more than five years’ work by the agency, which has struggled with previous attempts to launch a bond.

In March last year, Room151 revealed that the UKMBA was dropping the “joint and several liability” (JSL) clause that commits borrowers to cover liabilities caused by defaults on payments by other participants.

Along with adverse market conditions, concerns over the JSL guarantee among potential borrowers was seen as a key factor in the ongoing failure of the agency to issue its first bond.

In October, the agency appointed financial adviser PFM to administer the agency on an outsourced basis, following which the firm reworked the guarantee.

Whereas the JSL guarantee would have left authorities on the hook for the full amount of any default by other participants, the new “proportional guarantee” means participants will now only be liable for their own share of borrowing.

The agency’s efforts to launch its first bond were boosted by October’s decision by the Treasury to hike PWLB rates by a full percentage point.

Speaking to Room151 at the time of that decision, former UKMBA chief executive Aidan Brady said: “The increase in PWLB rates is likely to leave many councils considering alternative sources of borrowing.

“It also means that aggregating borrowing to issue bonds at rates below what those councils can achieve through the PWLB becomes an even more cost-effective option for them.”

According to the UKMBA, around 25 councils have signed up to its framework agreement, its basic loan document.

The Room151 Weekly Newsletter covers local government treasury and pension investment, funding, development, resources and technical finance. Register here. 

The LGPS Quarterly Briefing focuses purely on pension fund investment. Register here.