Brexit vote prompts huge spike in PWLB borrowing
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Photo: © European Union 2016 – Source : EPAPimages.
Many local authorities are continuing to increase borrowing through the Public Works Loan Board in the wake of the Brexit vote as the lender revealed a 1,600% jump in loans issued in June.
PWLB figures show that it lent £1.326bn to councils in June – up from May’s total of £74.2m – with councils gambling on a Remain vote and a potential increase in interest rates.
However, PWLB borrowing rates have fallen further since the EU referendum following a reduction in gilt yields caused by “flight to safety” investment.
Bridget Uku, group manager of treasury and investments at London Borough of Ealing, told Room151: “We are locking in some low interest rates by deferring some of our internal borrowing.
“This helps us reduce the risk of us running down our reserves and being forced to borrow at a higher rate when they are exhausted.
“Now PWLB rates are so low, it would be ridiculous not to take advantage of that.”
More than £1bn of the June figure was borrowed ahead of the EU referendum result, with the weighted average life of borrowing over the month coming in at 34.5 years.
On Wednesday, the standard PWLB 50-year maturity rate dropped to 2.31%, meaning councils could borrow over the term at the discounted certainty rate of 2.11%. In June, the figure for the certainty rate over 50 years was nearer 2.75%.
This drop may leave councils who borrowed from the PWLB last month – mostly at long maturities – kicking themselves for gambling on Remain.
But it also presents new opportunities for councils wishing to take out longer term loans.
Bhupinder Chana, principal finance officer at Leeds City Council, said: “We are looking to lock borrowing in at lower rates for between 40 and 50 years. It is costing us a little more against short-term borrowing but we expect the long-term benefits to outweigh this.”
The fall in bond yields is not all good news, however. David Smith, director of resources at Kirklees Council, warned: “Whilst this might herald cheaper borrowing, given the volatility in the commercial property market a number of regeneration schemes could need a further stimulus to get them away.
“Falling investment yields might also influence the triennial actuarial review of pension fund contributions putting pressure on already strained revenue budgets.”
Mark Horsfield, director at treasury adviser Arlingclose, warned that councils could be in danger of taking on too much long-term debt, although he said that he could “understand, to some extent, the lure of the borrowing rates that are historically low in absolute terms supported by a specific borrowing requirement”.
He said: “Like many, Arlingclose did not expect the Leave vote to succeed but, if it did, we viewed interest rates were more likely to fall further in response to the increased economic uncertainty that such an outcome would deliver.
“Conversely, we did not believe that a vote to Remain would drive interest rates and expectations higher. For all intents and purposes we viewed that outcome as being business as usual.”
Arlingclose has revised down its economic forecast and interest rate outlook in expectation of an easing of policy by the Bank of England’s Monetary Policy Committee.
He said: “We believe the MPC will view any increase in inflation as temporary and will not, therefore, sanction higher official interest rates as a policy response. The much- lower-for-much-longer interest rate outlook remains a key pillar upon which our treasury management advice is framed.”
Steve Thompson, director of resources at Blackpool Council, said that he and his team would now be looking at any opportunities to restructure the authority’s existing debt in the wake of the post-Brexit rates environment.
He said: “We will be looking at each loan individually, probably to replace them on a like-for-like basis but we could look at extending the lengths as there is good value at the long end.”
Earlier this week, the PWLB started setting negative interest rates for the early repayment of fixed rate loans, a move understood to be a first in its 200-year history.
David Green, client director at Arlingclose said: “It has been commonplace for the PWLB to charge a premium on top of the outstanding principal for local authorities to repay loans early. But for some loans they are now charging a premium on top of all the outstanding principal plus scheduled interest payments.”
