Council report casts doubt on emergence of competitive PWLB alternatives

A report by London Borough of Haringey finance officers has sounded the alarm over the options for councils to find cheaper lenders than the Public Works Loans Board (PWLB) following the increase in its lending rate.

The report said councils would face a pricing risk until the market expanded enough to compete with the PWLB, something the report warned might never happen.

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March 25th, 2020, Manchester
Council treasury investment & borrowing

Haringey earlier this year proposed to use large amounts of PWLB borrowing to help fund for a £1bn council housing programme, but the report warned alternatives to the PWLB “will bring with them a significantly elevated resourcing requirement for Haringey officers, and will be far more costly administratively”.

The PWLB in October increased the cost of new borrowing for local authorities by 1 percentage point, to gilts +1.8%.

Haringey has borrowed some 70% of its requirements from the PWLB with the rest coming from other local authorities. “This must now be reviewed in line with the change,” the report warned.

While the council’s treasury management strategy permitted borrowing from a number of sources “it was not anticipated that any alternatives to PWLB would be utilised given the low cost of PWLB funding previously”.

A further attraction of the PWLB had been “the low administration cost associated with raising funding, which was done by a simple phone call from officers when new borrowing was arranged”.

The “significantly elevated resourcing requirement” of dealing with other lenders would depend on whether the currently underdeveloped market for lending to councils expanded now that the PWLB’s rates were less attractive.

“The market which provides alternative funding to the PWLB for local authorities is not well developed,” the report noted.

“Only a handful of authorities have raised funds via alternative routes, as PWLB rates have previously been at levels that competitors could not offer. This is now likely to change, and the market is likely to reassess the possibility of lending to councils.“

The report though explained that with the PWLB benchmark having increased to gilts + 1.8% there was a risk “that the market will increase pricing for funding to just below this new benchmark, for example, a lender who had previously been willing to lend to councils at gilts +1.2% could now increase their offer to gilts +1.7%: just below the new PWLB rate.

“This pricing risk will prevail until it becomes clear that the market for alternatives to PWLB is so developed that lenders have to offer significant discounts to the PWLB benchmark rate in an attempt to compete with one another.

“It is unclear at this stage whether this level of competition will ever materialise, and it is likely to take some time to do so.”

Alternative lenders so far appeared limited in what they offered. The report said talks with high street banks suggested Haringey could borrow only for up to seven years at rates that compared favourably to PWLB.

“This is too short a duration for this to form a major component of Haringey’s revised borrowing strategy, where the majority of funds borrowed will be in excess of 20 years,” it said.

Institutional investors might lend at between gilts +1.2 and +1.8%, or lower, for more than 20 years via private placement agreements, the report said, but entering into these would be administratively complex, and anyway limited to £50m each, so forcing Haringey to do multiple deals to meet its borrowing requirement.

Issuing a bond would require the council to first secure a credit rating.

Although a few local authorities have done this, the report said it would be “an involved, lengthy and costly process” with no guarantee that rates offered would be lower than those of the PWLB.

The report concluded that it was clear that alternatives to the PWLB would require “far more involved due diligence processes, borrowing will likely have to be done in large tranches, rather than taking small amounts incrementally…and rates offered will differ depending on the financial position of individual authorities”.

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