How to be a smart borrower

An increase in PWLB rates has seen treasury officers deluged with offers of credit from the private sector. David Green writes local authorities should take care with the money they borrow.

Since the October increase in Public Works Loan Board interest rates, local authorities have been flooded with offers of money from the private sector.

But these come with the complications of a longer application process and often with additional contractual terms too. How do you choose which offer to accept?

The first question should be, “Do we need the product in the first place?” You wouldn’t buy pens and paper, no matter how cheap and functional, if the stationery cupboard was already full to bursting, but local authorities often don’t apply that logic to buying money.

Government statistics show that half of the authorities who borrowed in the third quarter of 2019 already held more than £50m in cash; 16 held more than £250m and two had over a billion in the bank but still borrowed more.

Products are only cheap if you actually need them.

Secondly, when the stationery cupboard is looking uncomfortably empty, don’t just take what is being offered to you, consider what you actually need. No matter how persuasive that fountain pen salesman is, buy some biros if they are going to produce a better outcome.

Similarly, you may get lots of offers for various types of long-term loan, but it maybe that short-term borrowing gives you the best risk/return profile.

Debt costs

Authorities with a debt portfolio that is 100% long-term fixed rate made a massive gamble in the past that interest rates can only go up.

The last 50 years, however, have shown that interest rates can keep going down. Better to keep a proportion short-term, or at variable rates, so that if the economy tanks and your commercial income and retained business rates fall, at least your debt costs fall too as the Bank of England cuts rates to stimulate the economy.

Finally, when you really do need that box of fountain pens or that long-term loan, don’t take the first offer that comes along, or the one from the salesman with the shiniest brochure.

Take a lesson from your procurement colleagues and send a request for proposals out into the market. Explain to potential lenders how safe a borrower you are and what sort of loan fits your needs, and then ask them to respond by a deadline. You may be surprised how much a bit of competitive tension can impact on the offers you receive.

Authorities that issue a 100-page invitation to tender to procure thousands of pounds of treasury management advice but will commit to paying millions of pounds of loan interest with just a telephone call have got their priorities wrong.

Use that treasury adviser to help you test the market properly and assess the various responses, balancing cost and contractual terms. That advice might pay for itself a hundred times over.

Extras

And a final word on some of the extra features and covenants often added to market loans and bonds.

If the lender has suggested index-linking, early repayment in certain circumstances, guarantees or any other feature, that’s almost certainly because it’s in their favour.

Make sure you understand what impact it has on your risk profile, and whether it presents any accounting complications with revenue consequences.

Anything that makes the cash payments attractively low but causes an unexpected burden on the revenue account is not a real saving at all.

David Green is strategic director at Arlingclose Limited