UPDATED: Lancashire County Council has been revealed as the local authority set to become the first borrower from the UK Municipal Bonds Agency (UKMBA).
Last week, Room 151 revealed the agency is poised to launch its long-awaited first bond on behalf of a single local authority within weeks, with a second issue set to follow before the end of the financial year.
It is understood that officers at Lancashire have agreed the move, but that the deal is still subject to usual governance processes.
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Room151 understands that the first issue – for a single local authority – will have a duration of five years, and will be a floating-rate note linked to the SONIA rate.
The UKMBA’s first bond is set to be a floating rate note worth £250m to £300m, according to sources close to the deal.
Room151 understands that the first issue is set ti have a duration of five years, and will be a floating-rate note linked to the SONIA rate.
The source said: “The transaction is expected to be completed by the end of January or early February subject to market conditions and completion of all the documentation including confirmation of the bond’s credit rating.”
The bond will not fall within the agency’s proportional guarantee and will be fully guaranteed solely by the authority for which the bond is being launched.
A floating-rate note is a debt instrument with a variable interest rate, tied to a benchmark rate – in this case SONIA.
SONIA is replacing the previous benchmark LIBOR rate from next year after the latter was the centre of a manipulation scandal in the middle of the decade.
The interest rate benchmark LIBOR is expected to cease after end-2021.
Credit rating agency Moody’s last year upgraded Lancashire County Council’s financial outlook from “negative” to “stable”, citing the authority’s progress in reducing its four-year cumulative savings target by two-thirds.
While the authority’s “Aa3” rating remained unchanged, Moody’s Public Sector Europe team said it expected Lancashire’s financial performance to “improve considerably” by the 2022/23 financial year.
The agency said the improved outlook was a result of a projected cumulative savings requirement of £381.8m set out in 2018’s medium-term financial plan.
The UKMBA’s second bond, which will be issued on behalf of a group of authorities, has been pencilled in for late March or April, and will be covered by the proportional guarantee.
This bond is expected to be worth around £250m with a 10-year duration at a fixed rate, although it is understood that the prospective borrowers are yet to finally agree the duration.
In October, the agency appointed financial adviser PFM to administer the agency on an outsourced basis, following which the firm reworked the guarantee.
Whereas the JSL guarantee would have left authorities on the hook for the full amount of any default by other participants, the new “proportional guarantee” means participants will now only be liable for their own share of borrowing.
The agency’s efforts to launch its first bond were boosted by October’s decision by the Treasury to hike Public Works Loan Board rates by a full percentage point.
Speaking to Room151 at the time of that decision, former UKMBA chief executive Aidan Brady said: “The increase in PWLB rates is likely to leave many councils considering alternative sources of borrowing.
“It also means that aggregating borrowing to issue bonds at rates below what those councils can achieve through the PWLB becomes an even more cost-effective option for them.”
According to the UKMBA, around 25 councils have signed up to its framework agreement, its basic loan document.
This week, the Financial Conduct Authority’s (FCA’s) working group on sterling risk-free reference rates welcomed the adoption of SONIA in new public issues of sterling floating rate notes, covered bonds and securitisations.
Edwin Schooling-Latter, director of markets and wholesale policy at the FCA, said: “SONIA has now become the norm in new issuance of floating rate sterling bonds and securitisations, and it is encouraging to see the successful transition of LIBOR-referencing securities to SONIA.
“But there is still much more to do. We encourage market participants to build upon this momentum, and thank them for sharing these lessons learned from successful consent solicitations to date.”
This story was updated on 16 January to include details about Lancashire’s involvement.
Room151 understands that the first issue – for a single local authority – will have a duration of five years, and will be a floating-rate note linked to the SONIA rate.
The source said: “The transaction is expected to be completed by the end of January or early February subject to market conditions and completion of all the documentation including confirmation of the bond’s credit rating.”
The bond will not fall within the agency’s proportional guarantee and will be fully guaranteed solely by the authority for which the bond is being launched.
A floating-rate note is a debt instrument with a variable interest rate, tied to a benchmark rate – in this case SONIA.
SONIA is replacing the previous benchmark LIBOR rate from next year after the latter was the centre of a manipulation scandal in the middle of the decade.
The interest rate benchmark LIBOR is expected to cease after end-2021.
The UKMBA’s second bond, which will be issued on behalf of a group of authorities, has been pencilled in for late March or April, and will be covered by the proportional guarantee.
This bond is expected to be worth around £250m with a 10-year duration at a fixed rate, although it is understood that the prospective borrowers are yet to finally agree the duration.
In October, the agency appointed financial adviser PFM to administer the agency on an outsourced basis, following which the firm reworked the guarantee.
Whereas the JSL guarantee would have left authorities on the hook for the full amount of any default by other participants, the new “proportional guarantee” means participants will now only be liable for their own share of borrowing.
The agency’s efforts to launch its first bond were boosted by October’s decision by the Treasury to hike Public Works Loan Board rates by a full percentage point.
Speaking to Room151 at the time of that decision, former UKMBA chief executive Aidan Brady said: “The increase in PWLB rates is likely to leave many councils considering alternative sources of borrowing.
“It also means that aggregating borrowing to issue bonds at rates below what those councils can achieve through the PWLB becomes an even more cost-effective option for them.”
According to the UKMBA, around 25 councils have signed up to its framework agreement, its basic loan document.
This week, the Financial Conduct Authority’s (FCA’s) working group on sterling risk-free reference rates welcomed the adoption of SONIA in new public issues of sterling floating rate notes, covered bonds and securitisations.
Edwin Schooling-Latter, director of markets and wholesale policy at the FCA, said: “SONIA has now become the norm in new issuance of floating rate sterling bonds and securitisations, and it is encouraging to see the successful transition of LIBOR-referencing securities to SONIA.
“But there is still much more to do. We encourage market participants to build upon this momentum, and thank them for sharing these lessons learned from successful consent solicitations to date.”
This story was updated on 16 January to include details about Lancashire’s involvement.
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