Brent Council in its Treasury Management Strategy published this week has restated that it will probably need to borrow more in the coming financial year, and has said that it will look to increase the return on its surplus cash investments.
The council flagged in its September 2018 Cabinet report “Brent Council Borrowing Strategy 2018/19 – 2020/21” it will need to consider borrowing in 2019/20.
This would be in contrast to recent years, in which it has kept debt low.
“However current interest rate forecasts along with the significant levels of planned capital investment over the next three years means that this approach may no longer be sustainable or optimal.”
The council currently has £397m of loans, a decline of £14.6m over the previous year, due to the early redemption of some LOBO loans and repayments on EIP (equal instalments of principal) borrowing.
The balance sheet forecast produced by the council shows that it anticipates that this will increase by £166m by 2020/21, though the amount depends on how the capital programme progresses.
It will also look to pre-fund if deemed opportune.
“In accordance with the September 2018 strategy report the council may also borrow additional sums to pre-fund future years’ requirements, providing this does not exceed the authorised limit for borrowing of £1.1 billion”.
For the moment the council says it make sense to borrow short term or use internal resources,with long-term rates much higher, but with the assistance of adviser Arlingclose, it will monitor the possible benefits of borrowing longer.
If long-term rates were forecast to rise, it could make sense to lock in funding now.
The council would also consider forward-starting loans where the interest rate is fixed now, but the money received later.
Brent says it will consider issuance under the UK Municipal Bonds Agency, but due to the joint and several guarantee of the planned scheme, together with the lead time between the commitment to borrow and the council knowing what rate it would achieve, any decision to use it would be subject to a separate report to the full council.
Brent has £70.5m of LOBO (lender’s option/borrower’s option) loans.
It says it will repay these if it has the opportunity to do so at no cost.
The council is aiming to move some investments out of bank deposits, due to bail-in risk, and to generally invest some of its surplus cash in higher-yielding assets.
“Given the increasing risk and very low returns from short-term unsecured bank investments, the council aims to further diversify into higher yielding asset classes during 2019/20.
“However it is worth noting that this approach might be limited to the extent that this the capital investment plans are delivered in line with current expectations.”
Most of the council’s surplus cash is currently invested short term with other authorities, in money market funds and in certificates of deposit.
“This diversification will therefore represent a change in strategy over the coming year”.
Its average rate of return over the year to December 2018 was 0.71%, which it would like to double.
Its upper limit for lending beyond a year will be £50m, and the maximum duration for surplus funds invested outside the gilt market is 20 years.
It will consider investing in corporate bonds, but will aim to achieve diversification, either through buying a portfolio of small individual investments, or investing in bond funds.
Brent currently has no investments in pooled funds other than money market funds but will consider using them in future, subject to a limit in 2019/20 of £20m.
Investments in real estate investment trusts (REITs) will be similarly limited to £20m.
