County warns of ‘predatory’ loan offers following PWLB rate rise

A county council has warned of “predatory” lenders circling the local government sector in the wake of the government’s decision to raise the Public Works Loan Board (PWLB) interest rate.

The stark assessment came in Worcestershire County Council’s treasury management strategy which went before councillors at the authority last week.

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

The council’s TMS outlines a strategy of external borrowing aimed at replenishing some of the reserves and cash balances which it has used to support capital borrowing since 2008.

It said: “Other sources of borrowing [to the PWLB] will be considered.

“However, some sections of the market have already responded to this rise in a predatory manner, with reheated versions of the controversial LOBOs and other debt products with opaque structures and features recently coming into the market, the council will tread carefully in considering other sources of borrowing.”

It said that it would look to borrow from other local authorities, as well as considering “plain vanilla fixed rate borrowing from other financial institutions” for terms of up to 30 years.

In addition, it will look at forward rate agreements for fixed rate loans for drawdown at a future date.

Responding to the strong wording in Worcestershire’s TMS, David Blake, strategic director at treasury adviser Arlingclose, said: “Predatory might not be the right word, but there have been some deals on offer that you might call ‘naïve’ on the part of some lenders.

“The structures of some deals don’t match the risk, reputation and rate aspirations of local authorities and they are unlikely to get any uptake.”

However, Blake added that such lending offers are the exception and that “there are a lot of sensible products” being developed by lenders.
Local authorities want simple and straightforward funding at a competitive price versus PWLB. 

David Couling, broker at Tullet Prebon agreed with Blake’s assessment, telling Room151: “There have been some margins quoted in the market post the PWLB rate rise that have been a bit hopeful.”

He added that “a number of lenders are assessing local authority credit – while some are well versed on the sector, for others this is new territory”.

He said: “These are experienced credit people who will run the rule over the sector then each individual local authority – only then will they determine the margin they will be happy to lend at.”

“I think offers will come out over the course of time as potential lenders get comfortable with the sector. They won’t rush into this.”

Carol Culley, deputy chief executive and city treasurer at Manchester City Council, said: “Local authorities need to be very careful with any form of financial instrument and make sure that they go into it with their eyes open, understand the implications and get appropriate advice.

“That’s not to say we shouldn’t look for alternatives.

“I always benchmark the longer-term financial implications and cost of any option against PWLB along with an assessment of risk.

But she warned: “I am worried that the aggressive pushing of some of the options could lead to some local authorities making decisions that could ultimately discredit all of us.”

Last week, Room 151 reported warnings from experts that the PWLB could remain the only option to access borrowing for councils with poor credit ratings.

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