PWLB bombshell: ‘Best day for a long time’ for bonds agency
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This week’s Public Works Loan Board (PWLB) rate rise has boosted hopes that the UK Municipal Bonds Agency (UKMBA) can finally issue its first bond, as the organisation announced the appointment of its new outsourced provider.
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March 25th, 2020, Manchester
The UKMBA has failed to get its first bond off the ground since its launch more than five years ago, partly due to the low rates on offer to councils through the PWLB.
But the 1% hike in the PWLB’s borrowing rates has given fresh impetus to the agency’s hopes of getting an issue off the ground.
UKMBA chief executive Aidan Brady said: “The increase in PWLB rates is likely to leave many councils considering alternative sources of borrowing.
“It also means that aggregating borrowing to issue bonds at rates below those councils can achieve through the PWLB becomes an even more cost-effective option for them.”
Brady told Room 151 he was surprised by the Treasury’s move earlier this week.
He said: “We were predicting the PWLB would do something, but I don’t think anyone expected they would do what they did, nor at the scale they did it. Given they did, we must get the agency into the market and funding councils, as soon as possible. The sector needs it.”
A briefing from treasury adviser Arlingclose to its local authority clients, seen by Room 151, said: “This will probably be the best day at the bond agency in a long time. There is now a strong rationale for using this source of funding.”
However, the note said that the agency still faces challenges, “not least the fact they have spent almost all the funds raised, with question marks still surrounding the agencies on-going viability”.
The UKMBA has always expressed confidence that it could launch a bond at a rate lower than the PWLB, but suffered from the ease with which councils could access cheap PWLB funding.
Brady said: “Historically the PWLB has been the natural first port of call for councils looking to borrow. That has been a major challenge for the agency and anyone else who wants to compete.”
Rob Whiteman, chief executive of the Chartered Institute of Public Finance and Accountancy, said: “I think the Treasury’s move will drive councils to look at bond funding, and you can see an argument that it might make the bonds agency more attractive as a source of funding.”
The UKMBA was further boosted this week by the announcement that it has appointed financial advice firm PFM as its “managed service provider”.
The agency launched the hunt for an outsourced management solution in August, to help it develop a new operating model and corporate structure.
Brady said that PFM will “be working with a group of councils to revise the bond structure and remove the joint and several guarantee requirement, which we hope will lead to the launch of an initial and subsequent bonds”.
The joint and several guarantee, which was originally proposed as part of the agency’s offer, meant all borrowers would be jointly liable, should one borrower fail to repay.
It is understood that PFM’s plan also includes new flexibilities in the proposed bond structure to avoid early repayment penalties.
In addition, the agency is set to revive plans to allow councils to take advantage of short-term borrowing through a separate mechanism to the bond.
More from Room 151 on the PWLB rate increase:
PWLB rate rise: Market makers step in to signal new era for council finance
PWLB rate hike sends shockwaves through council finance sector
Councils plead for discount PWLB rate to save housing and regen schemes
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