The UK Municipal Bonds Agency (UKMBA) is set to replace the problematic “joint and several guarantee” with proposals for borrowers to take proportional liability for any defaults.
The agency announced in March that it would drop the joint and several requirement, which had put a number of councils off borrowing through any of the agency’s proposed bond issues.
Earlier this month, the agency appointed financial adviser PFM to administer the agency on an outsourced basis, and the firm this week unveiled its proposals for the revised guarantee that helped it win the contract.
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Explaining the new guarantee to Room 151, June Matte, PFM’s managing director, said: “Councils would be liable for any defaults proportionate to their participation.”
Sir Merrick Cockell, chairman of the UKMBA, told Room 151: “Under the original model it was possible for a single council to be held liable for the whole amount of the default. There was limitless liability.
“The potential arose for a creditor authority to chase a very strong local authority with sizeable assets for the whole amount of the defaulted amount.
“The idea is to make this a far more limited liability that section 151 officers and members feel is a sensible level of commitment.”
The exact wording of the replacement guarantee has not yet been nailed down but it is understood that law firm Clifford Chance will begin work on the text this week.
Because of changes to the guarantee and the structure of the agency, the MBA will seek a new credit rating from ratings agencies before launching its first bond.
In March last year, ratings agency Moody’s gave the agency an Aa3 credit rating with a “stable outlook”.
Matte said: “We have been discussing a structure with the board that we use in the USA and that the ratings agencies have some familiarity with.
“Some authorities in the USA have triple A ratings and they don’t have the advantage that UK councils have in being immune from bankruptcy. We are anticipating we will be able to achieve at least a double A rating.”
It is understood that the model PFM is proposing would involve the creation of a special purpose vehicle, independent from the bonds agency, to hold the bonds. This plan has yet to be agreed by the UKMBA board.
As revealed by Room 151 earlier this month, the agency is also proposing a short-term borrowing facility, which would allow councils to fund capital projects until enough councils come on board to launch a bond.
“The idea is to allow us to more regularly schedule bond transactions because we know people are in the pipeline.”
Matte said the agency would competitively procure the credit from banks to lend on for this purpose.
Cockell said: “The intention is that this will be in framework councils sign up to – so they can participate in issues or shorter term finance. It does put us more directly able to offer the same service as the Public Works Loan Board does.
“We will have a stricter credit process but councils will be able to ask for money and if an authority needs it quickly they will have it within days.”
This week’s Public Works Loan Board (PWLB) rate rise at the start of the month has boosted hopes that the UKMBA can finally issue its first bond.
This week, a Room 151 survey found that almost 60% of finance officers say their council is more likely to borrow from the bond agency following the rise.
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