The UK Municipal Bonds Agency is calling on councils to help it salvage plans for its first bond after dropping a requirement for borrowers to take collective responsibility for any defaults.
As reported by Room151 yesterday, the agency has written to its council shareholders announcing its intention to drop the “joint and several liability” (JSL), which has proved a major stumbling block to its plans.
In the letter, 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.
Cockell said: “We have had discussions with industry experts and we believe that it would be possible to aggregate borrowing and achieve a competitive rate without the need for a joint and several guarantee.
“To ensure that a redesigned offer meets the needs and addresses all previous concerns, we plan to establish a group of councils who have a borrowing requirement and are keen to be part of designing a revised lending product that will meet their needs.
“We believe that by assembling a group of councils who could co-design a revised offer and who want to borrow through the first bond, we can develop a product that will meet borrowers’ requirements and provide a model for the future.”
Cockell admitted that the JSL was the main reason for the failure to attract enough interest from councils willing to borrow through a bond.
He said: “The main concern raised by councils regarding the current UKMBA offering has been the joint and several guarantee.
“At the time we designed the UKMBA model (in partnership with an independent local authority advisory group) it provided the strongest guarantee likely to achieve the highest credit rating.
“Since then many conditions have changed and it is now clear that we need to significantly change the guarantee to ensure the offer meets councils’ future needs.”
However, following the announcement, some have raised questions over the likelihood of the agency ever issuing a bond.
Mark Pickering, director at treasury adviser Arlingclose, said: “The marriage of supply and demand ultimately decides the price of borrowing, in current markets it may prove difficult for the price, in the absence of a guarantee, to be attractive relative to [the] Public Works Loan Board.”
He said that his firm has consistently warned clients not to buy its equity because it believes the agency’s business plan was “excessively optimistic”.
In addition, Arlingclose has advised its local authority clients not to borrow through it due to the “encumbrance” of the JSL.
However, he said that if the agency had managed to get a bond off the ground, it would have “queued up all day long to buy its bonds” due to the security provided by the JSL
Pickering said: “Clearly removal of the joint and several guarantee could improve client’s appetite for borrowing, but conversely reduce appetite to buy bonds.”
