The Municipal Bonds Agency is set to outsource its management and operations to an external provider in a bid to get its first bond issue off the ground.
The agency, which launched more than five years ago, has struggled to get a bond off the ground due to low rival rates offered by the Public Works Loan Board and concerns over the “joint and several guarantee” which would see participants share responsibility for any defaults by borrowers.
Now, the agency is turning to the private sector for a solution, issuing a tender for a “managed service provider” to develop a new operating model and corporate structure for the agency.
The tender said: “This corporate structure will consider revisions to the joint and several guarantee structure, and be expected to retain the existing AA3 rating.”
David Blake, strategic director at treasury adviser Arlingclose, said: “It would be great if this works but the UKMBA has already spent four years and £6m trying to get this off the ground without success.
“While the joint and several guarantee was a major flaw it is not the only drawback.”
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The UKMBA tender said that proposed changes to the structure of the agency should include the retention of a robust credit process.
It said that this would likely be based on the agency’s current credit process based on the methodology used by ratings agency Moody’s.
But it said: “A supplier may wish to suggest an alternative credit process, but it must be one which is equally robust.”
Despite its difficulties, the agency’s tender outlines ambitious aims for the new provider – outlining an intention to capture up to 15% of the UK local authority lending market.
It said: “This would equate to an approximate volume of £1bn annually, or approximately three to four benchmark sized debt issues.”
Around 10 councils would be expected to participate in each bond transaction, it said.
Any new provider would be expected to manage the execution of debt issuance activities, executing and managing lending, developing performance indicators and marketing services to local authorities.
The tender document revealed that the agency currently has 56 shareholders and that 25 councils have signed up to the UKMBA’s framework agreement, governing the relationship between the agency and borrowing councils.
The tender follows an announcement by the agency in March that it intended to drop the “joint and several liability” (JSL), which has proved a major stumbling block to its plans.
In a letter to councils, UKMBA chairman Sir Merrick Cockell offered shareholders the chance to join a new group aimed at reshaping the offer and operational model of the agency.
It is understood that the new tender has been launched as a result of discussions with the councils that responded to the letter.
The specification document listed the issues deemed to be of importance to councils in the issuing of any future bond:
- Flexibility for early redemption of debt/trading of debt. (Lower early repayment penalties and ability to trade debt.);
- Flexibility of timing of drawdown;
- Balance of risk between large and small borrowers within an issue;
- Appropriateness of any guarantee structure (if required), to facilitate the widest participation;
- Variable vs fixed rate. Demand is likely to favour fixed for an initial transaction;
- Maturity – initial transaction preference is for around 10 years, though the ability to accommodate longer maturities and shorter dated variable rate issues should be considered;
- A rigorous credit process must be applied when assembling a pool of borrowing.
The latest set of accounts for the UKMBA, covering the year to 30 November 2018, show the agency reduced operating expenditure to £733,000 from £1.1m the previous year.
The accounts said: “In addition to not replacing staff who left in the period, the company has transferred the lease on its premises and is being provided with office accommodation by the Local Government Association.”
In addition, it said that the restructuring meant that the directors “have a reasonable expectation that the company will be able to provide financing to local authorities below the PWLB rate.
“Nevertheless, the company has taken longer to reach this point than originally anticipated.”
