The London Borough of Redbrige council has raised £75m by issuing a bond which aims to beat the PWLB certainty rate by 118bps.
The issuance comes just weeks after PWLB significantly raised its 50-year lending rate, making borrowing for local authorities more expensive.
Advisers say the bond is the first RPI-linked bond issued by a local authority and comes with an effective interest rate of 1.87%. The rate assumes RPI of 2.5%.
According to Antoine Pesenti, senior managing director at Traderisks, Redbridge’s funding advisers, the bond shows how capital markets can provide “tailored” funding to fit with a local authority’s budgets and investment needs.
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March 25th, 2020, Manchester
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“Our funding solution has allowed Redbridge to secure debt which is RPI-linked and which has a deferred structure, both features which are not available from the PWLB, and at a price significantly cheaper than PWLB,” Pesenti said.
He added that the debt replicates the structure used in sale and leaseback arrangements.
Redbridge’s bond has a 0% coupon rate and will be repaid in 48 annual payments from 2022 to 2069. Payments increase annually with RPI up to a ceiling of 5% per annum to protect against the possibility of high inflation.
Traderisks said that the bond was issued at a premium over its £63.9m face value, giving a negative real yield of -0.62%, or 126bps above index-linked gilts.
Speaking at Room151’s LGPS Asset Allocation Forum yesterday, Luke Webster, CIO of the GLA said: “Because of this policy change in central government, you’re going to see a lot more local government credit in the private market.”
Whitehall brought an abrupt fall in borrowing from the PWLB last month when it raised the rate on 50-year maturity loans from 1.81% to 2.82%.
This week Room151 reported that PWLB borrowing has now plummeted from £2bn in August, and £1.6bn in September, to just £469.3m in October, the lowest levels since September 2018 when levels dipped to £348.8m.
A letter sent by the Treasury to local authorities at the time of the rate rise, said: “Some local authorities have substantially increased their use of the PWLB in recent months, as the cost of borrowing has fallen to record lows.
“HM Treasury is therefore restoring interest rates to levels available in 2018, by increasing the margin that applies to new loans from the PWLB by 100bps (one percentage point) on top of usual lending terms.”
Experts said the move priced PWLB out of the local authority loans market.
David Green, client director at treasury adviser Arlingclose, said the rate hike “makes issuing a bond more cost effective”. However, he warned that finance departments should be prepared for more paperwork and longer lead times.
According to Webster, local government also has the flexibility to issue CPI-linked debt which may be preferable to investors such as those managing LGPS funds and seeking to match liabilities. He said that owing to the business rates retention funding stream, “it is likely that a major component of local government funding in the foreseeable future will be linked to CPI.
“If you’re looking for matching cash-flows…there’s very little CPI paper out there.”
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