“Trust” driving boom in inter-authority loans

As eyes move to the new financial year, treasury officers are expecting figures to show another bumper year for inter-authority lending.

Last year, figures released by the Department for Communities and Local Government showed loans made by councils to other councils or council-owned vehicles rising by 22.9% from £3.1bn at the end of 2012-13 to £3.8bn at the end of 2013-14.

Fears over the credit-worthiness of high street banks and poor rates on offer are driving a continuing boom, according to experts.

Bhupinder Chana, principle finance officer at Leeds City Council, told Room151: “I expect to see another increase this year.”

And Nick Tant, money markets Broker at Tradition, said: “Local authorities like to lend to each other because they trust each other’s credit.”

Sector figures say that most of the inter-authority lending is taking place on short-term loans – mostly a year or under, although a few have been arranged for up to five years.

One broker, who did not want to be named, told Room151: “There is more demand at the shorter end. Some authorities are saying they will be going short themselves when investing, so when lending they don’t want to go too long. The expectation of interest rate rises is the main reason stopping them committing for longer.”

Some councils might opt for inter-authority loans because they have reached the maximum allocation they are allowed with other counterparties, the broker said.

The broker said that local authority rates are generally at the lower end of the spread of around 30 basis points for three month loans.

Alan Simkins, local authority dealer at investment firm King and Shaxson, said: “We have seen quite a bit of activity particularly in loans of up to six months.

“Councils wanting to go longer have the option of using covered bonds and have adjusted policies to allow them to do that.”

Bhupinder Chana said that he thought there had been a tail-off in direct loan arrangements between authorities, with an increase in the use of brokers.

He said: “Brokers tend to be more on the ball with the shorter term markets – and it is much less hassle and speedier to go through them.”

Last year’s figures showed that in England, the rise was almost a quarter (24.9%), while Scotland saw a slight drop in such lending – down 1.8% from £93.1m to £91.4m.

Figures for 2014-15 are expected to be released by DCLG in early summer.

Photo (cropped): GotCredit, Flickr