The dominant role of the Public Works Loan Board (PWLB) as a source of local authority borrowing is a “cause for concern”, with fewer options making it harder to get to the price discovery point.
James Graham, pension fund and treasury investments manager at Kent County Council, expressed this view during a finance panel discussion at Room151’s Monthly Online Treasury Briefing.
Graham said that while it was good for the sector to have “plurality” in options, the PWLB remains Kent’s “default option”.
However, local authorities meeting the right criteria could get value from the UK Infrastructure Bank (UKIB), he said. Graham also noted that climate bonds are gaining traction in the sector, and can play a role in authorities’ portfolios. Private placement is another route some local authorities have taken.
Reflecting on Room151’s article on the lack of alternative borrowing options earlier this week, David Green, director at advisor Arlingclose, stated that the PWLB is “cleverly priced” and the “easiest place to borrow from”.
While UKIB offers similar rates, there are only “very specific” projects it will lend on and is likely place “more of an administrative burden” on authorities, he noted. “People like a short lead time when they decide they want to borrow…and their PWLB facility will already be open,” Green said.
A strong local authority with relatively lower debt and a good reserves position will likely be considered credit worthy by the private sector though, and “could get a pension fund or a bank to lend to you on more favourable terms”, he pointed out.
Elsewhere in the finance panel, Graham and Green, along with MOTB chairman Dan Bates from LG Improve, discussed the impact of possible interest rate cuts on the local authority sector.
Graham noted the importance of being in a position to react to opportunities when they present themselves, and advocated for scenario planning of debt portfolios.
The panel also assessed the inter-authority lending market, with Green stating that while there is currently £10bn of loans between local authorities, there “should be more” as currently banks are effectively “taking the profit margin”.
Graham also said there might be concerns in some areas of the local government sector over the potential need to internally explain transactions with financially struggling authorities, even if there was no risk of default.
Finally, the panel took questions on the IFRS16 and IFRS9 reporting standards. Green noted that there were “good reasons” to extend the latter and that it would be a “shame” if local authorities were to be disadvantaged if it did expire. In that case, authorities “will need to build up reserves and will be looking for other products that don’t need an override, there are options out there,” he said.
The MOTB also featured a macro economic update from Jack Holmes, portfolio manager at Artemis Fund Managers, who explained why short duration bonds should interest investors in the current market climate.
Room151’s Monthly Online Treasury Briefings take place on the last Friday of every month. Please click here to register.
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