Up to 20 local authorities could make bond issues of more than £100m within a year, finance experts forecast this week.
Councils’ renewed interest in municipal bonds has been driven by councils needing to pay off £13.6bn of housing debt owed to the Treasury due to the abolition of the Housing Revenue Account (HRA) system, coupled with a sharp increase in the cost of conventional borrowing.
The Public Works Loan Board (PWLB) raised its rates by 25% in October, a move that provoked dismay among councils (22 Oct 2010; LGCplus.com/5020796.article).
Birmingham City Council, which will have to pay down nearly £400m of housing-related debt, the biggest individual HRA subsidy system exit payment, told LGC a bond issue was an option.
Chief executive Stephen Hughes said: “We are considering our options at the moment [for paying down the HRA debt], of which bonds is one. We will probably take an ‘in principle’ paper to cabinet before the end of the summer,” he said.
He added the council was also looking into whether or not to get a credit rating.
Croydon LBC also confirmed to LGC it was investigating bond issues, and treasury management advisers predicted more would follow suit because of the potentially favourable borrowing rates on offer.
Treasury management advisers Sector, which is in discussions with numerous councils on the matter, said more than 40 authorities needed to pay off £100m in relation to getting out of the HRA system, and predicted a raft of bond issues in 2012.
“As many as 20 local authorities could undertake an issue in their own right of £100m or more but some may look at clubbing together to achieve critical mass,” said Sector associate director John Whitehouse.
The prospect of councils tapping the bond market for the first time in more than a decade has attracted significant interest from leading financial institutions.
Barclays Corporate head of local authorities, Chris Hearn, said while authorities would face set-up costs, borrowing costs via a bond issue could be substantially cheaper than from the PWLB.
Mr Hearn said: “There is considerable interest from authorities. A council could achieve a far more favourable rate through a bond issue than the 100 basis points over gilts rate offered by the PWLB, although this could change.
“The bond market starts to get interested in issues at around £150m, although slightly smaller issues could be possible,” he added.
The news follows the Local Government Association announcement in March that it was scoping plans for councils to club together to issue up to £7bn of Scandinavian-style ‘local government bonds’.
The LGA calculated this could cut borrowing costs for capital projects by nearly a half but did not think a model would be operational until 2013 (LGCplus.com/5027201.article).