A further three councils have decided to repay their Lender Option Borrower Option (LOBO) loans, totalling £40m, following “unacceptable” interest rate hikes.
According to Treasury Management Strategies (TMS) for 2023/24, Oxfordshire, Worcestershire and Redbridge councils repaid some of their LOBO loans within the financial year.
This comes as other councils including Newport and Blackburn and Darwen councils also decided to sell off their borrowing from banks.
In the past financial year, Redbridge council paid off its remaining two LOBO loans, with a combined value of £20m, following the lender exercising its rights to increase the interest rate payable. The authority’s TMS noted that the “new rates were not acceptable to the council”.
Between the years 2005 and 2008, the authority entered into five LOBO loan arrangements, borrowing a total of £35m at an average rate of 4.06%. At the time, the rates were relatively cheaper than those offered by the Public Works Loan Board (PWLB).
Since the LOBO loan fiasco emerged in 2015, local authorities have been trying to exit out of the arrangements.
In 2015, it was revealed that councils had been persuaded to take out £15bn of high-interest loans 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.
During the previous financial year, Redbridge also decided to repay £6m of maturing PWLB debt, with its total external borrowing standing at £383.7m in March.
Exiting LOBO loans and entering MMFs
Alongside Redbridge, Oxfordshire repaid £10m of its LOBO loans, with its holdings in the arrangements totalling £35m in March 2024.
The council’s outstanding debt totalled £284m in March, with the average interest paid on the borrowing during the year at 4.39%.
At the same time, Worcestershire council held £50m of LOBO loans, although decided to repay £10m of this borrowing in April after rate hikes.
The authority’s total external borrowing was £555.4m in 2024, with it holding investments worth £85.9m.
According to Worcestershire’s TMS, the council holds the majority of its investments in Money Market Funds (MMFs), with the authority increasing its commitments to MMFs by £23.3m in 2023/24.
In total, the authority’s allocations to MMFs increased from £45.8m in 2023 to £69.1m in 2024. Worcestershire’s TMS outlined that the council currently hold investments in funds managed by Insight, LGIM, Blackrock and Aberdeen.
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