• Home
  • About
  • Subscribe
  • Conference
  • Events Calendar
  • Webcast151
  • MOTB
  • Log In
  • Register

Room 151

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews

How to be a smart borrower

0
  • by David Green
  • in Blogs · David Green · Treasury
  • — 24 Feb, 2020

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

Share

You may also like...

  • Treasury Q&A: Innes Edwards, Edinburgh City Council Treasury Q&A: Innes Edwards, Edinburgh City Council 3 Mar, 2016
  • Expert Panel: Structural reform and local government Expert Panel: Structural reform and local government 25 Feb, 2015
  • Euroland deposits and loans, part 2 Euroland deposits and loans, part 2 12 Jan, 2012
  • Central bank support paves way for progress Central bank support paves way for progress 27 Jan, 2012

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 2 days ago

    The vaccine may help settle cash flows but inflation remains a risk: Sponsored article: Lauren Sewell examines the prospects for long-term borrowing as Brexit settles and vaccines are deployed against Covid-19. On the 9th October 2019 Whitehall sent… dlvr.it/RqZXCr pic.twitter.com/PzgOZOGQ0k

    Room151 2 days ago

    ESG in liquidity: Sponsored article: Gavin Haywood looks at the integration of ESG in Federated Hermes’ money market funds. Federated Hermes has over 300 public sector clients invested in our AAA rated money[...] dlvr.it/RqZX5f pic.twitter.com/E87sBXsay8

    Room151 3 days ago

    New realities of investing cash and liquidity: “What to do now?”: Sponsored article: Brian Buck looks at the “unique challenge” for cash management strategies. As investors assess the ongoing impact of the pandemic on their business, levels of cash and… dlvr.it/RqVbk9 pic.twitter.com/ZElVASmEUV

    Room151 3 days ago

    Extra finance promised by the government receives a broad welcome: Sponsored article: The financial pressures facing local authorities this year continue to pose challenges for council treasurers. While the launch of the UK’s Covid-19 vaccination… dlvr.it/RqTzTF pic.twitter.com/HCjH0pyHR5

    Room151 3 days ago

    A savvy approach to managing your cash: Sponsored article: Caroline Hedges examines the need for active cash management to achieve a higher than average return. Last year saw the already mountainous pile of negative-yielding debt around the[...] dlvr.it/RqTzMK pic.twitter.com/uP0RQYTJLt

    Room151 4 days ago

    Putting alternatives at the heart of multi-asset portfolios: Sponsored article: Nick Edwardson looks at the assets that provide the “most attractive opportunities”. We believe that asset allocation is the primary driver of investment returns and that the… dlvr.it/RqQ2Qt pic.twitter.com/WLBzvRRRUQ

    Room151 4 days ago

    Thriving in the pandemic: Avoiding the stragglers: Sponsored article: George Crowdy looks at the sectors providing opportunities for sustainable investment. Throughout much of 2020, we talked about why sustainable investing has thrived in the pandemic,… dlvr.it/RqQ2NQ pic.twitter.com/dxiPWKFsPl

    Room151 4 days ago

    The development of CCLA’s mental health benchmark: Sponsored article: Amy Browne examines the importance of investing in mental health in the workplace. We are living through a public health emergency in more ways than one. Physical health[...] dlvr.it/RqQ2Jx pic.twitter.com/o6yRSCX3oF

    Room151 5 days ago

    Brexit: What the EU trade deal means for the UK economy: Sponsored article: Hetal Mehta looks at the impact of Brexit on economic prospects. Four and a half years after voting to leave the EU, on Christmas Eve the UK finally[...] dlvr.it/RqLBDt pic.twitter.com/No62srfE8h

    Room151 5 days ago

    Cash dethroned: The quest for liquid yield: Sponsored article: Peter Hunt and George Carne ask how treasury departments can balance the need for yield and liquidity. The massive stimulus and waves of liquidity provided by central banks[...] dlvr.it/RqLBDj pic.twitter.com/05g6Zhu1kU

    Room151 5 days ago

    Richard Harbord: Delayed “capital determinations” make section 25 opinions a new crunch point: The severe pressure on local government budgets now means section 151 officers confront a tricky call on  whether they can make a judgement on the robustness… dlvr.it/RqLBDV pic.twitter.com/vTAbDKFzkI

    Room151 1 month ago

    PWLB Consultation: Analysis straight from Dickens: Helen Radall and Paul McDermott present a legal examination of the new PWLB borrowing rules as Charles Dickens might have imagined it. Free and easy PWLB (“Marley” to his friends)[...] dlvr.it/RnmwLq pic.twitter.com/yFxcPrQqEG

    Room151 1 month ago

    Room151’s top stories from a momentous year: 2020 was the year in which local government grappled with Covid-19, funding strains, controversy over borrowing rules and the threat of financial collapse. It has been an exhausting and historic[...] dlvr.it/RnlpZg pic.twitter.com/g3myNyox6J

    Room151 1 month ago

    Tracy Bingham: 2020, a year best forgotten but also one of learning: Many will rush to erase 2020 from their memories but, writes Tracy Bingham, there were also many lessons about finance teams, strategic planning and leadership. 2020: A year we’d… dlvr.it/RnlpY2 pic.twitter.com/m7G1krrtCu

    Room151 1 month ago

    Settlement must address ‘precarious’ local government finances: Dan Bates crosses his fingers for “no nasty surprises” in this week’s funding settlement but argues the “bigger prize” is post-Covid financial certainty. Thursday (17 December) should be the… dlvr.it/Rnj9dG pic.twitter.com/KLKjjuBqJE

    Room151 1 month ago

    PWLB consultation: Big change on the way but there are ‘grey areas’ and opportunities: The consultation on PWLB borrowing has concluded creating a new landscape for funding property acquisition. Our experts look at the implications. Tracie Langley The… dlvr.it/RndRvJ pic.twitter.com/KEqXEBmEfq

    Room151 1 month ago

    2021: Better income outcomes?: Sponsored article: Investors should be mindful of structural challenges posed to income generation as a result of rapid thematic change. Jon Bell looks at the prospects for the coming year.[...] dlvr.it/RndRsw pic.twitter.com/TxVk8aXkMq

  • Categories

    • 151 News
    • Agent 151
    • Blogs
    • Chris Buss
    • Cllr John Clancy
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Forum
    • Funding
    • Graham Liddell
    • Ian O'Donnell
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • LGPSi
    • Mark Finnegan
    • Recent Posts
    • Resources
    • Richard Harbord
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Treasury
    • Uncategorized
  • Archives

    • 2021
    • 2020
    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story Council audit fees set to be frozen amid increasing pressures on firms
  • Next story And here is the LGPS news: It’s better than you read in the press

© Copyright 2021 Room 151. Typegrid Theme by WPBandit.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we'll assume that you are happy to receive all cookies from this website.OK