Manchester City Council is set to refinance £400m of borrowing over the next three years amid market “instability”.
According to Manchester’s Treasury Management Strategy for 2024/25, the council must refinance maturing short-term debt of £100.9m in 2024/25, £140.7m in 2025/26 and £145m in 2027/28.
Sitting down with Room151, Tim Seagrave, commercial finance lead at Manchester, explained that the task will be “challenging” due to interest rate forecasts and “instability” in inflation figures.
“I think it’s going to be challenging, given all the challenges that we’ve got in the sector, there’s very few local authorities that are going to have spare cash in the back of the sofa that they can use to offset higher interest rates. So, it will take some navigating,” he said.
The £400m debt slated for refinancing primarily stems from the authority’s substantial capital programme to refurbish its Grade I listed town hall. Unlike other councils, Manchester couldn’t delay the project when interest rates began to rise due to it nearing completion. Consequently, the authority opted for affordable short-term borrowing, which forms part of our treasury management strategy, Seagrave stated.
He explained that Manchester is looking to refinance this debt using the Public Works Loan Board (PWLB) as its benchmark, but it is also open to looking at other avenues, including brokers and banks, “any alternative open to us that is acceptable”.
Different market
When asked whether brokers are offering alternative rates to the PWLB, Seagrave explained that “they’re trying to beat” the government’s offering but only on one-to-three-year duration loans.
“10 to 15 years ago, you might have had banks and building societies interested. That demand at the moment just isn’t there. There’s been some fluttering in the market, but not anything that I would describe as being particularly concrete,” he said.
The lack of borrowing options available to local authorities is due to two reasons: the misunderstanding of what a section 114 notice is and lenders using the PWLB as a “price point”, Seagrave explained.
“There’s a bit of a misunderstanding around what a section114 really means, which is in the press. It’s not an organisation going bust, it’s an organisation saying they can’t close the budget gap in the year.
“In theory, we are attractive debt, we are the public sector. Yes, there’s noise around section 114s, but we are quasi-government debt,” Seagrave said.
However, he stated that there are lots of issues, which have confused organisations outside of local government on this issue, one being that there is “nothing directly saying that local authorities can’t go bust”.
Alongside this, there is a lot of discussion around “what is the fair rate?” Seagrave said. “Having the PWLB there and it being the lender of last resort, means that it’s far easier for banks and building societies and other financial institutions to price close to PWLB,” he added.
“The UK Municipal Bonds Agency (UKMBA) has also not taken off, be it for the lack of demand from local authorities or scepticism in the sector about it.
“So, we’re not seeing that kind of challenge to pricing that perhaps we could have envisaged 10 years ago,” Seagrave explained.
Inter-authority market challenges
Currently, Manchester externally borrows through the PWLB and the inter-authority lending market, although that is not to say that the latter form of borrowing has not had problems, with it experiencing a lack of liquidity over the past couple of years.
At Room151’s LATIF North conference, speakers warned that the “biggest challenge” that the inter-authority market currently faces moving forward is the recent issuances of section 114 notices that have “created less availability”.
Since 2018, eight councils have issued section 114 notices. One of these is Thurrock, which borrowed £687.5m from counterparties in the inter-authority market before it declared that it could not balance its budget.
This in turn has led to a “reticence” in the market from some councils to lend to authorities that are in slight financial difficulty or completely withdraw from the market altogether.
A sentiment that Seagrave agreed to, suggesting that councils are not worried about the “risk” of lending to these authorities “it is the association that they’re worried about”.
However, some in the sector would argue that a section 114 notice is a “credit-positive event” due to it effectively bringing the authority “under the wings of central government”.
Credit rating?
When asked if having a credit rating would provide local authorities with more borrowing options from other local authorities and the private sector, Seagrave responded cautiously. He explained that a credit rating reflects not only financial strength but also risk appetite.
“We’re not like private sector organisations. Private sector organisations have a share price to worry about, I wouldn’t want to be in a position where we’re having to tell members what they can and can’t say because it could impact the credit rating, I feel very much like it’s the wrong way round,” he added.
Is local authority borrowing heading for ‘chaos’?
However, Seagrave explained that s114 notices are not his only concern for the inter-authority market. “My concern is I think a lot of locals will be following the same strategy, which is looking to wait to lock in long-term debt until interest rates fall, which means there’ll be a lot of demand for relatively short-term cash across local authorities.”
This will cause two issues, Seagrave said. One being that the “demand will be sky high, which will cause rates to rocket” and, two, that there won’t be the supply.
“I think there’s going to come a tipping point where there just isn’t the money to go around. We’ve done some borrowing from the PWLB for one to two years, where ideally, we’d have taken it from the local authority sector, but either the prices we were quoted were too high or the money just wasn’t there,” he said.
Seagrave warned that if this occurs, local authority borrowing “could potentially become slightly more chaotic”, questioning how high rates would have to rise before local authorities are willing to commit to long-term borrowing.
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