Private sector and institutional lenders have been quick to react after the Treasury this week priced itself out of the long-term local government lending market.
A new era for local authority capital finance dawned this week after the Treasury increased interest rates on Public Works Loan Board (PWLB) lending by a whole percentage point – pricing the loan facility at 180 basis points above gilts.
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March 25th, 2020, Manchester
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Private sector players are understood to be repricing their offers in response to the news, as local authorities urgently revisit the viability of regeneration and housing capital spending plans relying on PWLB cash.
David Blake, strategic director at treasury adviser Arlingclose, told Room 151: “It is definitely possible to get well inside the 180bps above gilts PWLB is now offering.
“We are already talking to pension funds and banks that are confident of undercutting the new PWLB rate by some margin.
“When PWLB rates were at 80bps above gilts, a lot of lenders were saying that the market wasn’t for them. But at a margin of 120bps to 150bps, it is more interesting for them.”
Also reacting to the rate hike, David Whelan, managing director at treasury adviser Link Market Services, said: “The PWLB’s new pricing structure for standard and certainty rate loans does now no longer represent good value for local authorities.
“There are a number of lenders available who can offer better overall terms to those authorities that meet their minimum credit criteria and transaction size, despite the costs of raising finance being greater, and the lead-in times longer, than borrowing from the PWLB.
“These alternative lenders can also be more flexible in their structuring of the loans which, when combined with the lower funding costs, are expected to provide significant future benefits to our clients in the funding of their capital financing requirements.”
Pete Gladwell, head of public sector partnerships at Legal & General Investment Management, Real Assets, said that the pensions sector would stand behind local government in funding capital spending.
He said: “Local authorities have a increasingly important social role to play in regeneration, affordable housing, and providing the social infrastructure required to enable our communities to flourish.
“At this time of broader uncertainty, it’s important that we provide them with the stability they need from their funding sources in order to fulfil that social role.”
A briefing note from Arlingclose to local authority clients, seen by Room 151 says that there could also be a growth in longer-term local authority to local authority loans, which are currently generally made on a short-term basis.
However, it predicted that rates in this market may increase due to extra demand.
In contrast to the voices in the sector saying that PWLB rates are no longer likely to be attractive to local authorities, a spokesperson for the Treasury said: “This one percentage point increase takes rates back to levels that were available in 2018. Even with this change, the PWLB rates offer very good value to local authorities.”
But Blake said that the only councils likely to want to take out PWLB loans in future are those that are unable to access finance from elsewhere.
He said: “It is going to be councils with below average financial strength that already have a high level of borrowing and low reserves.
“They are going to struggle to get funding at a decent rate from the rest of the market.”
Arlingclose’s briefing note predicted this would lead to a further divide between strong and weak local authorities and said “we presume this is precisely the outcome HM Treasury are seeking.”
More from Room 151 on the PWLB rate increase:
PWLB rate hike sends shockwaves through council finance sector
Councils plead for discount PWLB rate to save housing and regen schemes
PWLB bombshell: ‘Best day for a long time’ for bonds agency
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