Local authority debt strategy and diversification in a new era

by Guest
in Blogs · Treasury
— 22 Oct, 2020

Photo: Scott Graham on Unsplash

Local authorities aware of all their options for managing risk will be the best prepared to find a way through the current uncertainty, writes Fraser MacKay.

As the pandemic continues, in many respects, local authorities continue to play the role of unsung heroes keeping the country going as it battles the economic and social impact.

The ability of so many councils to maintain critical services as demand has shot through the roof is something I think they should be very proud of.

Having supported local businesses by distributing more than £11bn* in Small Business Grants and Retail, Hospitality and Leisure Business Grants, councils now have the added burden of handling the recently announced ‘Local Disruption Grants’.

They’ve had to do all this while rapidly adapting to unfamiliar ways of working, coping with staff shortages, and providing the support that staff need to do their jobs from home.

Without doubt, the pandemic has rapidly accelerated the pace of change that local authorities were already facing—implementing new technology, addressing the green agenda and responding to wider societal changes—all at a time of significant budgetary pressure.

This has required robust and capable leadership under pressure, and I think that management teams will emerge all the stronger for it over the coming years. There’s certainly never been a sterner test of council leaders’ ability to think on their feet, react, plan, act and be agile as they’ve grappled with the challenges of transformation and change, while balancing precarious budgets.

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More funding uncertainty

As we all know, pressure on council finances isn’t new, but funding has become a greater challenge under Covid, with income streams from car parking, public venues, business rates and rents shrinking just as demand for support in homelessness, adult social care and domestic abuse services has risen dramatically.

Indeed, the Institute for Fiscal Studies recently estimated that, even with government financial support, English local authorities face a shortfall of at least £2bn and potentially in excess of £3bn to maintain services at pre-pandemic levels**.

On top of this, just when local authorities really need to know where their money will be coming from, the outcome of the Local Government Fair Funding Review and the future funding formula has been deferred until next year.

How all this will play out over the next 12 months will, of course, depend in part on how quickly the pandemic recedes and the economy bounces back.

Diversifying Risk

To this end, authorities have now started to examine the possible financing alternatives available to them, to diversify the risk associated with being reliant on one or two sources of funding. Council leaders have been looking at this on both the short and long-term time horizon.

In the short term, to reduce reliance on the intra-LA borrowing market, some authorities have implemented short-term liquidity lines with banks to reduce the risk of sharp shocks to their cash flow. The de-linkage of these facilities from wider LA market demand and supply of funds has also created a commercial incentive to do this. Some councils have even considered committed revolvers with financial institutions for up to 3-5 years, something that would have been unthinkable five years ago.

In the longer term, the public bond and private placement market has become a credible alternative to the PWLB for funding to support local authorities’ future growth plans.

This year alone we have seen in the news headlines a number of councils raising finance through private placements as well as the MBA’s debut public bond issuance for Lancashire (for which Barclays was joint bookrunner). The demand for this type of paper has been extremely high, resulting in competitive spreads for the issuing authorities.

As the world becomes ever more uncertain, the requirement to diversify funding risk will become more and more prevalent and I believe the authorities who are aware of all their options are the ones who will be best set up to navigate this challenging environment.

Fraser Mackay is head of local authorities at Barclays Corporate Banking.

To explore your council’s financing options, please contact fraser.mackay@barclays.com or your local Barclays relationship director.

*Coronavirus grant funding: Local authority payments to small and medium businesses
**IFS report COVID-19 and English council funding: how are budgets being hit in 2020–21 August: updated in September

Photo by Scott Graham on Unsplash