‘Risky’ councils set to struggle to access PWLB alternatives

The Public Works Loan Board (PWLB) could remain the only option to access borrowing for councils with poor credit ratings, according to industry experts.

Local government finance experts gathered in London last week to explore the new financing landscape for councils following the government’s decision to raise the rate of borrowing from the PWLB in October.

3rd LATIF NORTH
March 25th, 2020, Manchester
Council treasury investment & borrowing

Speakers at the event, organised by accountancy and professional services firm EY, said that a tranche of authorities could be excluded from new streams of borrowing available from institutional investors and the resurgent Municipal Bonds Agency (MBA).

Fiona Dickinson, investment director at Aberdeen Standard Investments, warned that funders will be wary of councils that are seen to have been taking big risks with their borrowing.

She said: “We have seen an awful lot of noise about commercial real estate investing.

“Clients do not want to see headline risk.

“Northamptonshire County Council has been in the headlines, and clients ask, ‘are we exposed to that name?’

“Other local authorities have very large amounts of commercial real estate debt and have been in the headlines for those reasons.

“Clients don’t want that sort of noise being brought to the boards of their credit committee.”

Colin Lowen, local government director at NatWest, said that banks and institutional lenders are likely to distinguish between different types of proposals when making lending decisions.

He said: “If it’s an infrastructure project or regeneration or the things that you do as part of your normal day-to-day business, then that’s probably easier for us than something that’s more speculative.

“So if you’re looking at a speculative commercial investment, I think it’s a very, very different credit assessment.”

Dominic Brindley, director of corporate financing & risk solutions at NatWest said that a the benchmark size of bond issues for the local government bond market would likely be around £250m, although some deals could be done at a lower size.

June Matte, managing director at PFM, the firm running the MBA, said that the agency would be able to provide smaller amounts to individual councils by pooling a number of requirements in order to reach such a benchmark.

However, she warned that not all councils will be deemed creditworthy enough to use the MBA’s services.

She said: “One of the concerns that some authorities have had is, you know, I don’t really want to be in there with a risky authority.

“Because we are doing the credit work ourselves, we are able to screen out those authorities who may not have the appropriate credit quality.

“And I think it allows us sort of to return the PWLB to the rightful place of being the lender of last resort for those authorities who may not have the credit quality.”

Sarah Pickup, deputy chief executive at the Local Government Association, said she expected the PWLB to carry on as an important borrowing vehicle for councils.

She said: “It is a very simple way of borrowing and for some councils who have relatively small borrowing requirements, it probably feels much safer.”

Luke Reeve, partner and head of debt advisory at EY, said: “With the recent PWLB rate rise, it is likely that the majority of local authorities can now raise funds at a lower cost from bank facilities and institutional bonds, via private placements or bonds directly or through the MBA, paying a small agency premium.

“For those with known funding requirements it would be prudent to now assess all funding options to find the best fit and lowest cost of funds.”

The Room151 Weekly Newsletter covers local government treasury and pension investment, funding, development, resources and technical finance. Register here. 

The LGPS Quarterly Briefing focuses purely on pension fund investment. Register here.