Blackburn and Darwen Borough Council repaid one of its Lender Option Borrower Option (LOBO) loans worth £5m last year amid interest rate hikes.
Prior to December 2023, the authority held £13m of LOBO loans, according to Blackburn and Darwen’s treasury management strategy (TMS).
The report explained that during December, the authority was notified that the interest rate on its Dexia Credit Local LOBO loan of £5m was to increase from 4.35% to 4.96%. As a result of the interest rate hike, the authority decided to repay the loan.
Following this decision, Blackburn and Darwen Council now holds two LOBO loans worth £8m in total.
The TMS acknowledged that “with interest rates remaining relatively high, there is a good chance that lenders will exercise their options” to increase rates. In the case of this, Blackburn and Darwen may take the option to repay loans to reduce refinancing risk in later years, it added.
At the end of January 2024, Blackburn and Darwen held around £199.1m of borrowing and £86.7m of treasury investments, the TMS revealed.
The LOBO loan fiasco emerged in 2015 when it was revealed that councils were persuaded to take out £15bn in high-interest loans from banks despite some officers in local government not fully understanding the risks involved.
The interest rates on these loans were more than 7% in some cases, with expensive exit fees preventing authorities from moving to a better deal. At specific dates, either yearly or at longer intervals, the bank has the option to increase the interest rate on the loan.
It was revealed in 2021 that councils had successfully exited from at least £1.6bn worth of LOBO loans, although often the borrowing runs for up to 70 years.
The news at Blackburn and Darwen Council comes as Newport council repaid three Lender Option Borrower Option (LOBO) loans worth £15m in total last year.
According to Newport’s TMS, the authority was given notice that the lenders of three of the six loans Newport held were intending to increase the interest rates on the borrowing, one of which was planning to hike rates up from 5.05% to 6.8%.
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