Finance chiefs defend their record on LOBOs

Council finance officers this week hit back at a Channel 4 investigation into Lender Option Borrower Option loans and defended their use of the instrument.

The Dispatches programme, How Councils Blow Your Millions, was broadcast on Monday night and implied that services provided by local authorities have suffered in recent years due to the interest rates paid on LOBOs. It claimed that refinancing the LOBOs – mostly taken out during the noughties – at today’s rates could save councils £145m a year in interest payments.

A press release issued by Channel 4 said: “Some councils like Newham and Cornwall are being charged interest rates of more than 7% on tens of millions of pounds of these LOBO loans at a time when base rates are at a historic low.”

The programme acknowledged that, on average so far, councils have paid less in interest on their LOBOs than if they had borrowed from PWLB at the time. However, it went on to draw a number of conclusions on value for money based on comparisons between those rates and record low rates currently on offer.

Andy Brown, assistant head of finance at Cornwall Council – one of the councils named in the investigation – defended the county’s position and labelled the broadcast “completely one-sided”.

He told Room151: “At the time our loans were taken out, LOBOs offered a good source of borrowing. We have explained that to our councillors and they are comfortable with that.”

Conrad Hall, chief finance officer at London Borough of Brent, told Room151: “I thought that it was disappointing that the Dispatches programme didn’t really get to grips with what is an admittedly technical subject.

“In claiming that some LOBOs are at what are now high interest rates of over 7% the programme failed to highlight that the alternative PWLB loans that councils could have entered into, for example in the early 1990s, would also have been at high rates compared to today.”

A spokesman for the Local Government Association said: “We tried to work closely with the Channel 4 production team during their investigations to help them understand how to view this type of borrowing. However, they looked at the loans in hindsight and judged the decisions made on today’s environment.”

Bhupinder Chana, principal finance officer at Leeds City Council, said Dispatches had also given a misleading impression that penalties for exiting Lobos were unusually punitive – in particular highlighting a £15m breakage cost on one £25m loan.

“If you wanted to collapse a long-term PWLB loan before its maturity date then you would be paying a similar percentage exit fee to those quoted on the Lobos,” Chana said.

He also said the investigation had failed to explain one of main features of LOBOs – the “borrower option” which makes up half of the name.

“The programme completely missed the point that at a pre-agreed point, if the bank wants to vary the rate, the local authority has the option to walk away, without penalty,” he said.

Andy Brown admitted that the inverse floater LOBOs held by many councils – where rates vary in inverse proportion to LIBOR or other rates – “stick out like a sore thumb” at the moment due to their high interest rates – up to 7.6% in Cornwall’s case.

But 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.”

The LGA spokesman also said that the programme had overestimated the scale of LOBO borrowing among councils at £15bn.

During the Dispatches programme, Clive Betts, chairman of Parliament’s Communities and Local Government Select Committee, said he wanted his committee to investigate how LOBO loans were sold to local authorities.

Speaking to Room151 after the programme, Betts said: “The new select committee will meet for the first time next week. It will be a committee decision, but I would think we would want to have a further look at this.

“I thought the programme raised a very real concern about the sorts of loans local authorities may have got into and the extent to which the details were made known to councillors at the time.

“How were these loans reported ? Were they reported at all? Were councillors given any detail about how the loans were configured?”

When contacted by Room151, the Financial Conduct Authority said that it has no powers to investigate loans made to local authorities.

Betts said: “That is something the committee would want to look at. If the FCA does have the power then why haven’t they looked into this? If they don’t have the power then why not,and shouldn’t they be given responsibility for it?”

A statement from Capita Treasury Solutions on its role in advising councils on LOBO loans when it was known as Sector, said: “We provided generic, factual, comparative information to local authorities regarding their funding options to meet their capital funding requirements.

“We did not and do not direct local authorities to seek funding from any specific organisation as the choice of funding provider is that of the local authority alone.”

Andy Brown also voiced concerns that the programme could make the life of council treasurers more difficult in future. “The impression given to the public is that we are inept muppets and have been taken for a ride by the bank,” he said. “That isn’t true. We knew what we were doing when we entered into these loans.”