Cornwall ends inverse LOBOs
0Cornwall Council has become the first council to announce that it has repaid “inverse floating” Lender Option Borrower Option loans (LOBOS), ridding itself of an £85m portfolio in December.
In recent months, a number of councils have repaid hundreds of millions of pounds in LOBOs, but Cornwall has become the first to confirm that it has repaid “inverse floating” versions of the instrument – where banks have an option to propose a rise in interest payments if general banking rates fall.
The council used borrowing from the Public Works Loan Board (PWLB) to repay the loans which were taken out with Royal Bank of Scotland, which it said would lead to significant savings over the borrowing term.
A council spokesman told Room151: “Cornwall Council took three separate loans totalling £135m from the Public Works Loans Board during December 2018.
“The new loans were used to repay £85m of LOBO debt and a further £50m to redress part of the council’s under-borrowed position to help pay for significant planned capital expenditure.”
The exact level of savings from the LOBO repayments would become clear when it releases its final budget proposals, which are due imminently, it said.
The repayment of Cornwall’s inverse floating LOBO portfolio leaves the council with £234m of remaining “vanilla” LOBOs, where banks can propose a rise in interest repayments if general banking rates rise.
Cornwall’s LOBOs featured in the 2015 Channel 4 Dispatches documentary investigation which brought the issue of the loans to national attention for the first time.
Speaking to Room151 in the wake of that broadcast, Andy Brown, who is now service director for resources at the authority, admitted that the inverse floater LOBOs held by many councils “stick out like a sore thumb” at the moment due to their high interest rates – up to 7.6% in Cornwall’s case.
However, he said: “Our members understand that over a long period of time, the inverse floaters are there to protect against interest rate rises.
“On the ones we entered into, we got a two- or three-year introductory offer with a lower period of interest which means that we can still demonstrate value for money.”
In July 2015, during an evidence session as part of an inquiry into LOBO loans by Parliament’s former Communities and Local Government Committee, Abhishek Sachdev, chief executive officer of finance firm Vedanta Hedging, described inverse LOBOs as “some of the worst possible ones you could have”.
Overall borrowing from the PWLB during December reached £1.8bn – a record level since Room151 started collecting data in 2016.
The previous monthly record was the £1.33bn borrowed in June 2016, in the run-up to the Brexit referendum.
During December, Luton Borough Council took the second highest loan after Cornwall from the PWLB of £127.5m, using £27.5m to refinance some of its LOBO portfolio.
The other £100m will help finance the Luton Direct Air Rail transit scheme, aspart of the PWLB Local Infrastructure Rate initiative announced in the Autumn Budget.
A number of councils borrowing significant amounts from the PWLB during December to fund capital spending included South Lanarkshire Council (£78m), London Borough of Southwark (£76m), Birmingham City Council (£60m) and Nottingham City Council (£40m).
