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LGA bonds prospectus sent to councils

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Finance directors are set to receive a prospectus this week for a collective bonds agency for local government.

The LGA is pushing ahead with its plans for a collective bonds agency despite changes to the Public Works Loan Board rates which appeared to undermine the business case for such a body.

A letter due to be sent to all council finance directors in the next few days will argue there is still a market for the LGA’s bond proposition and invite officers to a series of regional briefings scheduled to take place in September.

As previously reported by LGC, the Treasury’s Budget decision to create a ‘certainty rate’ of 80 basis points above gilts, 20 basis points below its current standard rate, had cast doubt on whether the LGA bond offer could compete given it was originally envisaged at 70 to 80 points above gilts.

Also in the Budget, the Treasury suggested a third and even lower PWLB ‘scrutiny’ rate, although further details are yet to be unveiled.

In the prospectus which will also be sent to finance directors, the LGA argues that a collective bonds agency “managed by the sector, for the sector” would provide stability at a time when there have been “six changes in [PWLB] borrowing rules in three years”.

The LGA believes the proposed bonds agency could match the PWLB’s certainty rate in “normal market conditions”, although it also admits “the ongoing upheaval in the market makes it impossible to predict when more stable market conditions might return”.

It also admits that “the prospect of a further yet lower PWLB [scrutiny] rate undermines the financial case for the agency”, but adds “the terms under which the possible lower PWLB rate might be available to councils remain unclear.

“There is concern that these terms may require councils to submit to external scrutiny of capital spending, potentially undercutting elements of the prudential code. It is not clear if councils would want to participate in such an arrangement.”


Considerable risk

A collective bonds agency, originally proposed after the PWLB rate was increased to 100 basis points above gilts, would require the “at least tacit” support of central government, according to the LGA, although it is not clear this is forthcoming.

Senior sources told LGC they believe Treasury factions differ as to whether it is better to encourage councils to borrow in the wider market, by making the PWLB rate less competitive, or to be able to monitor their borrowing, by making the PWLB rates more attractive than any alternative.

The LGA’s bond prospectus states: “Securing and maintaining the necessary government support is a considerable risk as it appears that some parts of central government may be sceptical to the prospect of such an agency being created at this point”.

The uncertainty of the government’s intentions has led some to question whether the scrutiny rate will even materialise.

Mark Horsfield, director of treasury advisers Arlingclose, said: “The certainty rate does remain an unknown and it is still reasonably remote in terms of its fruition, so we wonder when it is going to come in, if at all.”

However, he questioned the LGA’s criticism of changes to the PWLB conditions in the last three years, pointing out that many of these had been favourable for councils borrowing, and said municipal bonds would struggle to match the PWLB rates given that recent issues by the Greater London Authority were currently trading at 99 basis points.

“There is no significant pressure to create an alternative although I think it is interesting and the LGA are going about it in a measured, professional and sensible way by not promising too much and consulting along the way,” he said.

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