Bonds agency set to drop collective liability requirement
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The UK Municipal Bonds Agency (MBA) is poised to undertake a major revision of strategy and remove a key hurdle to participation after five years’ of unsuccessful attempts to issue its first bond.
Room151 understands that the agency is to imminently announce it is dropping the “joint and several liability” (JSL) clause that commits borrowers to cover liabilities caused by defaults on payments by other participants.
The agency will now write – as early as this week – to all 56 of its council shareholders informing them that it will now adjust its guarantee structure to try allay councils’ fears.
Along with adverse market conditions, concerns over JSL guarantee among potential borrowers has proved to be a key factor in the ongoing failure of the agency to issue its first bond.
However, the move is set to mean that the agency will have to return to ratings agencies for an assessment of its credit-worthiness before trying to launch a bond.
The JSL was a key factor in the Aa3 rating assigned by ratings agency Moody’s to the MBA in March last year.
Moody’s said that the rating reflected a number of factors including “a joint and several guarantee of all borrowers”.
The agency, which launched in 2014, has consistently been at pains to emphasise the creditworthiness of local authorities, consistently pointing out that no local authority has every defaulted.
It also instituted a credit-vetting process to exclude any authorities deemed to be at most risk of being unable to repay borrowing.
Despite this, the JSL is understood to have deterred a number of potential local authority borrowers, worried about being required to carry the can for other authorities, were they to default.
In a council report from September, London Borough of Brent said that it did not take part in the bond, partly because it was “aware of the risks of joint and several liability”.
It said: “Had the MBA been established a couple of years ago and had Brent and Northamptonshire been in it then Brent, and other councils would have their default risk.”
Speaking at last week’s Room151 LATIF North event, before rumours about the strategy shift began to circulate, Christian Wall, director at financial adviser PFM, said: “A good group of authorities have worried about JSL for a whole host of reasons.
“That is probably misplaced. If Northamptonshire is proof of one thing, it is that the government will not allow a large authority to go bankrupt.
“Having said that, I think something has to change. Why keep doing the same thing over and over again?”
Speaking during the same session, Danny Mather, head of corporate finance at Warrington Borough Council said that the JSL was an issue that could be overcome.
He said: “To me, from my conversations the reason it is not working is because it has been floated at the wrong time of history.
“We are living in an age of very low interest rates and from my point of view…the reason they have not issued the bond is that they can’t beat the PWLB…”
The principal methodology used in Moody’s rating was its Public Sector Pool Financings document published in July 2012.
Writing for Room151 in April last year, David Green, strategic director at treasury adviser Arlingclose, said: “This document reminds us that the strength of a chain is its weakest link, and that an agency with few reserves of its own will run out of cash when its weakest borrower defaults.
“Framework agreements and guarantees can then uplift the pool rating above that of the weakest link.
“But only if one member is strong enough to step up on its own to cover a peer’s default is the pool credit rating likely to be close to that of the strongest link.”
A key aim of the agency has been to offer a lower borrowing rate to councils than they can get through the Public Works Loan Board, and it remains to be seen what effect removing the JSL will have on its credit rating.
A year ago, following the rating, the MBA said four councils were poised to be involved in its debut bond issue.
However, the launch never materialized, and in September the agency’s chair, Sir Merrick Cockell, said councils should stop “waiting to see what happens” and use the MBA.
The MBA has recently instituted a number of efficiency savings, moving its operations from serviced office space in Westminster into the headquarters of the Local Government Association.
It has also appointed Vitaly Voytenko, head of commercial development at the LGA as its secretary, taking over from private firm Norose Company Secretarial Services.
