Barnsley Metropolitan Borough Council has become the second UK local authority to agree a forward starting loan from pbb Deutsche Pfandbriefbank.
A forward loan instrument sees a principal loan sum and interest rate agreed at the time of execution, with draw down of the principal at a specified date in the future.
Barnsley executed the deal for a £20m loan in December and will receive the funds in March 2020. The deal follows a similar loan for the same amount agreed between the bank and Midlothian Council in June 2016.
The council has decided to take the loan because it is under-borrowed with significant loans maturing within the next three years, according to a statement from the council.
Ian Rooth, head of financial services at Barnsley MBC, told Room151: “Around 50% of our borrowing requirement was subject to interest rate risk at the start of the year and we wanted to reduce that. However, we are also striving to deliver savings for the council from our treasury management budget so this instrument allows us to continue to do this whilst still providing certainty in future.”
Rooth said that the rate of the loan — which will have a duration of 27 years and six months from 2020 — was marginally higher than the PWLB rate at the time it was fixed.
However, he added: “Our advisers have told us that PWLB rates have already gone above the rate of our loan due to interest rate volatility in the subsequent period, which obviously reassures us that we have made the right decision in executing the deal.”
In addition, Barnsley said it has a projected increased borrowing need over the same period, mainly due to capital investment growth plans.
Edward Simons, director of public investment finance at Deutsche Pfandbriefbank, told Room151: “My view is that this should be relevant to a lot of local authorities with definitive debt requirements going forward.
“This is a very prudent and conservative sector with lots of regulatory control and legislation.
“It takes a while to understand something new but we now have two reference points for other councils to look at.”
He said the bank is talking to a number of local authorities with a view to undertaking similar deals.
Roberto Moretti, principal at London Bridge Capital Infrastructure, which advised on the deal, said the rate Barnsley is paying for the loan is marginally higher than the current equivalent PWLB rate.
But, he added, the loan could end up saving the council money if interest rates rise.
Moretti said: “I think that this is something which will not be for everyone but there should be a lot of interest. A lot of authorities borrow over either the short term or use their own internal resources but will need to access fixed-term borrowing eventually.”
