Shadow chancellor John McDonnell has waded into the debate on Lender Option Borrower Option (LOBO) loans to councils, calling for authorities to be compensated for any losses they have incurred.
McDonnell was quoted in a Guardian article which revealed the results of research by campaign group Research for Action, which claimed that councils could save £16bn over 40 years by refinancing their LOBOs at lower rates.
LOBOs, most of which were taken out between 2000 and 2010, have proved a controversial method of borrowing in recent years, with critics claiming that they trap councils into paying higher levels of debt which banks can choose to increase when interest rates go up.
Quoted in the Guardian, McDonnell said: “The government has a role to play now in ensuring there is a full, independent and open investigation into the use of these financial instruments and action taken to restore any historic loss to the public purse.”
The Research for Action research calculated the amount that councils could save by refinancing their LOBOs by comparing the difference between the current rates being paid on the loans with the current rate being offered by the Public Works Loan Board.
It said that its figures excluded breakage fees, because, “there should be no extra cost for councils to exit illegitimate LOBO loans”.
However, speaking to Room151, David Blake, strategic director at treasury adviser Arlingclose, said: “In a fixed rate agreement, you have a lender who wants the certainty of a fixed rate.
“Tearing up these commitments and walking away from them is not practical.
“The debate about interest payments seems to have shifted to one about duration and fixed rate debt.
“LOBOs were taken out at a time when the rates were cheaper than through the PWLB. Why doesn’t McDonnell suggest looking at those loans, which many councils are still paying high rates on?”
He said that, as things stand, councils have done “very well” compared to an equivalent fixed rate PWLB loan taken out at the same time as their LOBOs were agreed.
In June, a group of councils banded together to take legal action against banking giant Barclays, claiming that manipulation of Libor rates cost them millions in repayments on LOBO loans.
At the beginning of November, Kent and Northamptonshire county councils repaid a combined total of £80m of LOBOs with loans from the PWLB.
