Newport City Council repaid three Lender Option Borrower Option (LOBO) loans worth £15m in total last year amid interest rate hikes.
At the beginning of April 2023, the authority held £30m of LOBO loans, consisting of six separate loans worth £5m each, according to Newport’s treasury management strategy (TMS).
The report explained that during the year, the authority was given notice that the lenders of three of the six loans were intending to increase the interest rates on the borrowing, one of which was planning to hike rates up from 5.05% to 6.8%.
As a result of this Newport chose to refinance the LOBO loans using £15m of long-term borrowing from the Public Works Loan Board (PWLB).
Newport’s total PWLB borrowing went up from £93.1m in 2022/23 to £104.5m in 2023/24 due to the redemption of two small loans from the body in the same year, the report stated.
The TMS strategy also noted that Newport’s accrued interest on its debt increased from £606,212 in 2022/23 to £1.86m in 2023/24.
The LOBO loan fiasco emerged in 2015 when it was revealed that councils were persuaded to take out £15bn in high-interest loans from banks 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.
It was revealed in 2021 that councils had successfully exited from at least £1.6bn worth of LOBO loans, although often the borrowing runs for up to 70 years.
Refinancing in 2024/25
In a commentary alongside the report, Meirion Rushworth, head of finance and section 151 officer at Newport City Council, warned that the authority should anticipate refinancing more loans in the current financial year.
The report noted that the authority’s remaining three LOBO loans have call dates within the next 12 months and a “large refinancing requirement for external borrowing” is needed.
“There is a certain need to undertake new borrowing of circa £20m towards the end of the financial year, due to some large loans maturing in March 2025, plus the impact of the reducing internal borrowing capacity, as well as the possibility that the remaining LOBOs could be called during the year,” Rushworth said.
The report noted that due to indications that interest rate volatility has “calmed” and advisors’ predictions that the Bank of England’s rates have peaked at 5.25%, Newport has “no intention” of taking out more long-term borrowing and will opt to refinance through short-term loans.
According to Newport’s TMS, the authority’s total investments reduced from £47.2m to £13.9m in 2023/24. “Because of the reduction in investment balances, it means that cashflow management will be more challenging, particularly towards the end of each month. As a result, it is likely that some short-term borrowing will need to be undertaken to assist with managing day-to-day cashflow requirements,” Rushworth added.
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