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Housing debt help could dampen enthusiasm for bonds

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Ministers’ surprise decision to cut interest rates on certain Treasury loans will kill off councils’ appetite to take to the bond market to pay off housing debt, experts told LGC this week.  

Chief secretary to the Treasury Danny Alexander announced on Monday that a special low interest rate on government loans will be introduced for councils needing to buy themselves out of the housing revenue account subsidy system (LGCplus.com/5035139.article).

The move, announced by Mr Alexander at the Liberal Democrat annual conference, represents a huge boost for the sector, saving councils an estimated £100m-a-year as they seek to pay off £13bn worth of ‘settlement payments’ to leave the existing annual subsidy system for council housing finance.

The one-off rate from the Public Works Loan Board, solely for HRA-related loans, will be substantially better than councils could get through the bond markets.

The move wrong footed local authority and city experts alike, who have been working on plans for council bond issues, with some sources privately conceding to LGC they were “shocked and surprised”.

Mark Horsfield, director at treasury management advisers, Arlingclose, said the move, which will see councils offered loans at around 20 basis points over gilt, would “effectively close discussions on bond market funding for the HRA self financing settlement”.

Chris Hearn, head of local authorities at Barclays Corporate, agreed that the move “would appear” to end the discussion in relation to HRA debt. 

Mr Hearn however stressed many opportunities for councils to issue bonds to fund other large infrastructure projects remained on the table.

Finance experts previously estimated local authorities would be able to borrow through the capital markets at a rate in the region of 80 basis points above gilts (around 4.4% for a 30-year loan as of Monday).

This would be around a 20 basis point improvement on a standard loan from the PWLB, which increased its rate to one percentage point above the gilt rate last October (around 4.6% for a 30-year loan as of Monday).

However, the new PWLB rate would allow councils to borrow at around 3.8% for a 30-year loan, a rate the capital markets cannot compete with.

PWLB secretary Mark Frankel said: “We will confirm the exact details shortly. The arrangement will represent better value for money for the tax payer. This money is effectively a transfer within government: it will be borrowed from the PWLB by councils who will pay it to the Department for Communities & Local Government.”

Finance experts had predicted up to 20 local authorities could make bond issues of more than £100m within a year to fund settlement payment earlier this year but re-thinks are now likely (LGCplus.com//5030492.article).

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