The Municipal Bonds Agency offers ‘certainty’ and a chance for councils to ‘control their own debt’

Barnsley is among the first three councils to raise debt through the Municipal Bonds Agency. Ian Rooth explains the reasoning.

Barnsley has committed to the first pooled bond by the Municipal Bonds Agency for two main reasons. Firstly, we want to demonstrate our support for establishing an alternative financing source for local authorities, which we think is very important, and secondly, because it fits in with our borrowing requirements.

The sudden and artificial 1% PWLB hike caused general consternation, and probably some panic, for authorities when it was announced back in October 2019. It was apparently imposed because of concerns over borrowing levels for purely commercial ventures. Unfortunately, all authorities suffered as a result—especially those that were in the middle of large regeneration projects like Barnsley.

Whilst it was unwelcome news, Barnsley had fixed a large part of its borrowing in the months preceding the announcement so did not require any kneejerk decisions.

Other authorities may have been less fortunate. For example, there were reports of some councils entering into more complex and colourful market loans to get equivalent pre-hike rates. These may cause issues further down the line in the way LOBO’s did in recent years.

For other cash-strapped authorities, the 1% increase may have had an even bigger impact requiring more savings from key services or even putting their planned developments at risk. In short, the hike has resulted in uncertainty, severely hindered financial planning and led to riskier options that may come back to bite some authorities. Of course, Covid 19 has emerged in the interim and in terms of impact, has put the PWLB hike in the shade. Nevertheless, we shouldn’t forget the major upheaval that it caused at the time.

Destiny and certainty

Moreover, whilst it was a surprising move, it was not the first time. Barnsley was in the middle of finalising Phase 3 of its £1bn Building Schools for the Future programme in October 2010 when news of a similar 1% rise was announced, again sparking consternation.

Significant shifts in interest rates are the main reason why Barnsley supports the MBA proposal. We want the local government sector to take control of its own destiny and not be subject to the whims of policy decisions like these.

Whilst I appreciate there are more urgent issues happening now, equally there has never been a better opportunity to establish the bond agency than at this moment. The pooled interest rate is likely to be well below the PWLB equivalent and therefore any savings will be significant.

Lancashire County Council proved this when they used the MBA to launch a single authority bond and secured a rate around 1% below equivalent PWLB rates – saving in excess of £3m per annum in the process.

The MBA approach is also similar to our own in that it’s primary focus is on certainty whilst still seeking to be sufficiently flexible to generate interest rate savings. Therefore, unlike previously, the MBA is providing options for authorities around different term periods as well as looking to offer up forward dated loans in future.

This is a type of loan that Barnsley has already carried out as it complements our treasury management strategy by creating a more certain backdrop, avoids the cost of carry and allows us to access cheaper short-term loans in the interim. In the current period of volatility, certainty and savings seem an ideal mix.

Joint and several

The MBA is also seeking to iron out some of the issues that beset earlier launches. The biggest prior issue was the “joint and several” guarantee to cover potential default. Although no local authority has ever defaulted on a loan, the “joint and several” guarantee did appear to be a frightening prospect as there didn’t seem to be any limit to the scale of underwriting that individual authorities could be subject to.

This has now been replaced by a proportional guarantee that seeks to cap the amount authorities are expected to underwrite and which ceases altogether as soon as an individual authority repays its loan (unlike previous arrangements).

For the reasons outlined above, Barnsley has already taken the move to commit to the first launch of MBA’s pooled bond. It does, however, need many more authorities to commit to the MBA to demonstrate to the market that there is both sufficient value and interest from the local government sector.

I know some authorities are waiting to see whether PWLB rates reduce as a result of the government’s current consultation. This is understandable but, as mentioned earlier, it is also the ideal time for authorities, as a collective, to identify their own alternative funding sources via the MBA platform.

Amidst all the issues that Covid-19 is causing to authority budgets and the prevailing uncertainty, isn’t it at least time to take control over the financing of our own debt?

Ian Rooth is head of financial services at Barnsley Metropolitan Borough Council.