Whatever happened to…the UK Municipal Bonds Agency?
0
Initially, Chris Buss wasn’t the biggest fan of the UK Municipal Bonds Agency. But changed circumstances mean he now thinks it is a win-win for local government
I have, as some of you may recall from some of my earlier posts, a fondness for British TV sitcoms in particular those from the 1970s.
One particular favourite episode was from Whatever Happened to the Likely Lads?, where the main characters Bob and Terry were trying to avoid hearing the score of an England game that they wanted to watch on the TV that evening.
It is a brilliant piece of comedy that you can catch, I believe, on YouTube.
The two 1970s series themselves were, in my view, far superior to the original 1960s version of The Likely Lads, for reasons that I can’t put my finger on.
In short, to me it was better.
So, what does this piece of nostalgia have to do with the Municipal Bonds Agency?
The bonds agency came out of the post-crash and early austerity era, when the government had increased the rates at which local government could borrow from the Public Works Loan Board (PWLB).
The idea of an agency raising finance for local government at a lower rate than that which individual authorities could raise finance from the PWLB was attractive, and the model is used elsewhere in Europe.
However, despite an initial burst of enthusiasm – with over 50 councils signing up as shareholders – and much of the spadework done to commence operations, to date no bond has been issued.
But the agency is still there.
Changed circumstances
I will be honest, when the agency was being mooted some four years ago, I wasn’t perhaps its greatest fan.
Working for what was then an authority that was not only cash-rich but with little need to borrow, I felt there was little reason to go to the expense and hassle of creating a rival to the PWLB where you could borrow at reasonable rates.
That’s a view which I have changed as circumstances have changed.
Amongst the reasons for my change of mind are Brexit, which will potentially remove access to the European Investment Bank for larger borrowers, and the recent promise to remove the housing revenue account borrowing cap, which will lead to a requirement for additional borrowing for local government.
This borrowing will need to be as cheap as is practicable to enable as many new houses to be built as the rental stream will permit.
In addition, I’m not sure as to how long the PWLB arrangements will last in their current form.
So, there is, perhaps, a different dynamic now driving the need for the agency that some, like me, didn’t see back in 2014.
First bond issuance
So, what does the bonds agency now offer that it didn’t originally?
Well, for a start, in the next few months, subject to demand from councils, it will be issuing its first bond.
It is no longer a theoretical concept but a functioning body.
This bond will be a short length bond for 10- 15 years. This is really a toe in the water, but it will be at a rate competitive with the PWLB.
The minimum loan for an individual council will be £1m.
I know some councils and some other agencies have perhaps undue concerns about the fact that the bonds agency’s current arrangements involve a joint and several guarantee.
Some will worry about this – it means they may have to pay for others if they default, but this is something that has not happened before, to my knowledge, in local government.
However, the agency recognises this concern and its own due diligence process will mean that those who are seen as having higher risk of default will not pass the agency’s credit process; there are examples out there already.
This due diligence rating will be shared with the council’s section 151 officer.
The intention is to try to go to the market in the first quarter of next year.
In order to do that, the bonds agency does need firm expressions of interest on the level of borrowing required from councils in the near future and for councils to formally accept its framework agreement.
The latter is something that can be done as part of the annual treasury management strategy and policy process that councils go through as part of budget setting.
This is a requirement of the bond issuing process, so it is essential that, if you are going to even think about borrowing from the bonds agency, you get the framework agreed – and 23 councils have already done so.
The process isn’t onerous and a template report exists. However, no agreement of the framework means no borrowing from the agency.
But why should you bother with the bond agency when you still have the PWLB, which you can get at the cost of a phone call?
Firstly, let me repeat again, the agency will aim to beat the PWLB on price. In times of straitened budgets, every penny saved helps.
Secondly, it will be secure as it can be.
Thirdly, you are helping local government to be resilient in the future.
Altruism isn’t always a strong point in local government but in this case it’s a win-win if you borrow from the agency.
This is really a one-off opportunity for local government to help itself and help each other.
If it doesn’t take off it will only give those detractors of local government another chance to bash the sector for failing to help itself.
So, let me return to Whatever Happened to the Likely Lads? and the connection with the bonds agency.
In the episode in question Bob and Terry eventually found out that the England game was flooded out.
Hopefully, that’s what will happen with the agency – but in a positive sense that it will be flooded with applicants.
It’s really up to the sector to make sure that the agency works. The hard work has been done but the benefits of that work can only happen if councils act positively.
Chris Buss is a former executive director (resources and assets) at the Royal Borough of Kensington and Chelsea and a former director of finance & deputy chief executive at the London Borough of Wandsworth. He is currently engaged by the Local Government Association to work with councils considering borrowing through the UK Municipal Bonds Agency.
