The UK Municipal Bonds Agency is to drop its requirement for councils to be liable if anther borrower defaults on their debt, following repeated failure to launch its first bond.
The agency was set up by the Local Government Association four years ago to offer councils an alternative to borrowing through the Public Works Loan Board.
Although the agency has more than 50 council shareholders, they have so far been reluctant to borrow through the agency due to the requirement that they be “jointly and severally liable” if another council defaults on its debt.
In a letter to shareholders yesterday, agency chair Sir Merrick Cockell acknowledged that the guarantee had been the “main concern” raised by councils about borrowing through the agency.
He said although last year a group of councils had agreed to go ahead while the guarantee was in place, the amount they were seeking to borrow was not large enough to be attractive to investors.
“At the time we designed the UKMBA model… it provided the strongest guarantee likely to achieve the highest credit rating. Since then many conditions have changed and it is now clear that we need to significantly change the guarantee to ensure the offer meets councils’ future needs.”
The agency was awarded an Aa3 credit rating from rating agency Moody’s last year, indicating lending to the agency would be a low risk for investors.
The letter continued: “We have had discussions with industry experts and we believe that it would be possible to aggregate borrowing and achieve a competitive rate without the need for a joint and several guarantee.”
The agency is now seeking shareholders who have a borrowing requirement to work with the agency on redesigning a new lending product.
Sir Merrick said: “We believe that by assembling a group of councils who could co-design a revised offer and who want to borrow through the first bond, we can develop a product that will meet borrowers’ requirements and provide a model for the future.”