Councils took out potentially hugely expensive loans despite it being unlikely that anyone in the sector properly understood their workings, MPs have been told.
A hearing by the communities and local government select committee into claims aired by Channel 4 earlier this month was told by finance experts that ‘lender option, borrower option’ (LOBO) loans were mostly inappropriate for councils. The committee heard some authorities were now contemplating legal action against advisers.
Channel 4 reported £15bn worth of LOBOs were taken out by an estimated 250 councils in all between 2003 and 2011, when it was thought interest rates would stay high.
Some are at interest rates of more than 7% and run for 70 years.
Councils could save £145m this year alone were it possible to refinance at current low interest rates the programme, How Councils Blow Your Millions, claimed. Its allegations led to the committee’s hearing.
LOBOs allow banks the option to raise borrowing rates at regular intervals. If they do this the borrower can leave the loan without paying an expensive breakage fee, although the borrower might then find it costly to refinance it.
When interest rates are low, as currently, lenders have no incentive to allow borrowers to leave without the breakage fee, thus trapping councils into high borrowing costs.
Questioned by committee chair Clive Betts, programme presented Anthony Barnett said some councils were considering legal action on grounds that advisers did not disclose all of the information on how LOBOs worked.
Abhishek Sachdev, chief executive officer of Vedanta Hedging, told the committee that LOBOs use complex derivatives to create “a superficially low attractive rate” but borrowing from the Public Works Loan Board would have been far cheaper.
Rob Carver, a former derivatives trader at Barclays Capital who advised the programme makers, said: “I categorically do not believe you could find a finance officer in a council who could accurately assess risk and rewards of LOBO.
“It does not matter if they are a qualified accountant; I would even say FTSE 250 officers could not analyse these on their own, they would need a specialist advisor.”
He drew attention to financial relationships between treasury management advisers and brokers that might prevent councils getting properly independent advice.
Mr Carver gave the committee two examples: “Butlers was owned by ICAP. It’s a treasury adviser and supposed to go to two different brokers, but ICAP owned Butlers and where Butlers were the treasury adviser ICAP happened to be the chosen broker on 77% of occasions.
“Sector is a treasury management adviser and had a financial relationship with Tullett Prebon and where Sector were advisers Tullett Prebon was chosen on 58% of occasions. It suggests some financial incentives were skewing some relationships.”
ICAP declined to comment but noted it sold Butlers in 2010. Sector has been contacted for comment.