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

Room 151

Impact Awards –>
  • 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

PWLB makes “seismic” rate cut as Warrington opts for bond issue

0
  • by Gavin Hinks
  • in 151 News · Blogs · Treasury
  • — 26 Nov, 2020

Photo: HM Treasury, Flickr

Additional research: Atharva Deshmukh.

As the chancellor delivered his spending review the local government borrowing terrain was rocked by a PWLB rate cut of 100bps despite  bond issues showing signs of growing momentum.

Separate developments have this week made local government borrowing contested ground. First the UK Municipal Bonds Agency unveiled its third bond issue bringing the total value up to £850m in a year and marking a distinct turn from PWLB borrowing. But then the chancellor’s spending review saw the Treasury reveal that PWLB would cut all standard and certainty rate loans by 100bps, sending shockwaves into local authority treasury departments across the country.

The developments are likely to prompt a pause in finance departments as officials assess the new borrowing landscape. It was only 12 months ago that PWLB raised loan rates amid concerns about the sums invested in commercial property by councils.

“HM Treasury would not have made this move had it not been for the few public bond market deals proving that was a cheap practical alternative.”—Mike Jensen

According to Mike Jensen, director for investment at Lancashire County Council, which this year sealed more than half a billion in borrowing through UKMBA, the rising popularity of other lending providers has prompted the policy change at PWLB.

“HM Treasury would not have made this move had it not been for the few public bond market deals proving that was a cheap practical alternative,” he says.

This week the UKMBA finalised arrangements for Warrington council to issue the agency’s third bond, this time for £250m, bringing the agency total to £850 (thisincludes two bonds issued by Lancashire CC of £350m and £250). Add in Sutton’s public bond of £250m issued this month and councils have used bonds for more than £1bn in borrowing. The use of a £75m interest rate swap by Plymouth earlier this year indicates local authorities are willing to further diversify their borrowing strategies.

The figures compare to lending from PWLB so far this year of £4.96bn, the bulk of that issued in March.

Data source: PWLB. Research: Atharva Deshmukh

Divert

But while there is agreement that recent developments mean councils are beginning to turn to bonds, the PWLB decision is likely to recapture the attention of treasury officers.

According to Luke Reeve, a partner in debt advisory at professional services firm EY, the PWLB move is “seismic”.  “Borrowing will divert back to the Debt Management Office [PWLB] rather than continue to broaden out to wider markets.” However, Reeve adds that the use of other sources of lending would be “good for responsible financial management and governance”, and would allow markets to price and monitor councils as creditors.

The PWLB rate cut does not come without strings. The Treasury also announced that from now on councils can only borrow from PWLB if finance directors “confirm that there is no intention to buy investment assets primarily for yield” in the three years following a loan. Finance chiefs will also have to submit a plan for capital spending and financing plans, also covering three years.

There is another condition. The restrictions mean PWLB will not lend to a council planning to buy assets for yield “regardless of whether the transaction would notionally be financed from a source other than the PWLB.” Failure to comply with the rules could lead to a council being banned from using the PWLB borrowing facility.

Those clauses could send councils back to the bond market, according to Mike Jensen.

“PWLB now limits what purposes they will lend for, so in order to fund projects that would not comply, then the bond market may remain the appropriate alternative,” he says.

He also suggests that if investors view the PWLB rates as an “upper bound”, and adjust their own spread expectations to below PWLB levels “then activity will pick up again.”

David Blake, startegic director at Arlingclose, sees interest potentially dropping off but points out that with UKMBA bonds trading below Gilts +80bps they still might offer a slim advantage over PWLB. He adds there is also more a little flexibility in structuring a bond over “fairly static” PWLB products. Bonds, he says, are “not completely dead”.

Politics

There was widespread agreement that momentum behind bonds was mounting. Lars Andersson, a Swedish expert on municipal bonds and an early advisor on the UKMBA project, says such agencies have proliferated elsewhere across Scandinavia, the Netherlands and now in France with the Agence France Locale where he is a board member.

“There are many agencies in Europe and typically local authorities use them because they have the best prices in the markets where they exist,” he says. One reason is their lean operating costs, he adds.

And their popularity is borne out by the market share bonds agencies have achieved. The Danish agency has cornered 100% while its Swedish counterpart has around 60%. The French agency is aiming for a 25% share of the local government debt market. Andersson believes agencies should not dominate a market “because you need some competition.”

Prior to this week’s rate change he warned about the PWLB, saying its importance would be undermined “if it continues to make changes for political rather than market reasons,” a comment that may resonate with those wondering why PWLB rates have proved so volatile over the past year.

Aside from cost, there may be other fundamentals that make bonds more attractive in the long term, including the sheer discipline of putting together a bond offering.

“Raising funding from commercial lenders will also bring greater rigour and governance requirements around financial management and credit quality, which should have positive long-term benefits,” says Luke Reeve.

For the time being finance chiefs and treasury officers will be assessing the new borrowing environment. Interest will no doubt swing back to PWLB but bonds are unlikely to be squeezed out entirely.

Photo: HM Treasury, Flickr
Rishi Sunak Photo: HM Treasury, Flickr

FREE monthly newsletters
Subscribe to Room151 Newsletters

 Monthly Online Treasury Briefing
Sign up here with a .gov.uk email address

Room151 Webinars
Visit the Room151 channel

 

Share

You may also like...

  • David Green: Top Five bond considerations David Green: Top Five bond considerations 3 Dec, 2015
  • Central reservation: Why Brexit paralysis in Whitehall is ruining councils’ financial planning Central reservation: Why Brexit paralysis in Whitehall is ruining councils’ financial planning 17 Jun, 2019
  • London LGPS pool appoints new chief investment officer London LGPS pool appoints new chief investment officer 11 Jun, 2019
  • Oxfordshire growth arc set for £100m workplace parking levy Oxfordshire growth arc set for £100m workplace parking levy 16 Jan, 2020

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 5 hours ago

    Impact Awards: Liverpool’s cafe culture and Warrington’s investment in homes: The CCLA/Room151 Impact Awards showcase  finance teams with a direct impact on their local communities and the environment. This week we spotlight Liverpool City Council’s… dlvr.it/RxJsKb pic.twitter.com/dEYpaz6HP0

    Room151 8 hours ago

    Doing something in #localgov #finance for housing or regeneration? Check out the 'Place Shaping' category room151.co.uk/impact-awards/… sponsored by @31tenConsulting in the CCLA/Room151 Impact Awards. #timetoenter !! pic.twitter.com/dU99vE6Wws

    Room151 1 day ago

    Doing something in #localgov #finance for Adult Social Care & Health? Check out the ASC&H category room151.co.uk/impact-awards/… sponsored by Fundamentum Social Housing REIT in the CCLA/Room151 Impact Awards. #timetoenter !!

    Room151 1 day ago

    Doing something in #localgov #finance for the environment? Check out the 'carbon management' category room151.co.uk/impact-awards/… sponsored by @ACSLLP in the CCLA/Room151 Impact Awards. #timetoenter !!

    Room151 1 day ago

    So what are the seven categories for the CCLA/Room151 Impact Awards? Here they are room151.co.uk/impact-awards/… #localgov #finance #outcomes

    Room151 1 day ago

    Why should LGPS be concerned about rising inflation?: The impact of the coronavirus pandemic, lockdown and wider economic uncertainty created  deflationary pressures which raise important considerations for the Local Government Pension Scheme writes… dlvr.it/RxF7Fs pic.twitter.com/JlcjROBIpz

    Room151 2 days ago

    JOB ALERT: LPFA Finance Director vacancy: London Pensions Fund Authority Finance Director and s151 Officer Competitive salary and benefits The largest Local Government Pension (LGPS) provider in London with around £6.5 billion of assets and 135[...] dlvr.it/RxBdJP

    Room151 2 days ago

    Richard Harbord: Further signs that local government finance is failing: The crisis in Liverpool and a fix for education budgets are further indication that local government finance is in need of a root and branch review. Even for those students[...] dlvr.it/Rx9PSV pic.twitter.com/sAanC2gEyu

    Room151 1 week ago

    Impact Awards: Finance helps launch school meals company and support business during lockdown: The CCLA/Room151 Impact Awards will showcase the way finance teams have a direct impact on their local communities and the environment. This week we spotlight… dlvr.it/RwnlF4 pic.twitter.com/AJhne1MVG4

    Room151 1 week ago

    "This work has made a vital, practical contribution to ensuring people have been supported through the pandemic." #impact #151awards #covid #s151 room151.co.uk/treasury/impac… #impactcasestudies #councilfinancemakesadifference

    Room151 1 week ago

    room151.co.uk/impact-awards/ #passiton #localgov #s151 #151awards pic.twitter.com/A0uO0dwBkM

    Room151 1 week ago

    Financial pressures loom for 2023 and beyond: Kate Ogden writes the government has addressed most of the short-term Covid-19 financial pressures facing English councils, but problems loom in 2022-23 and the years following. As we enter the[...] dlvr.it/RwfDsz pic.twitter.com/hpv2R09w75

    Room151 2 weeks ago

    Calling all #localgov finance officers and #s151s room151.co.uk/impact-awards/ It's the #151Awards Thanks to the @LGALocalism for helping us get the word out along with all the LA treasury societies. pic.twitter.com/Nkal9BrH1J

  • 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 Spending Review: Better than expected but councils remain ‘very short of funding’
  • Next story Financial sustainability: A corporate way of being even in a crisis

© Copyright 2021 Room 151. Typegrid Theme by WPBandit.