Local authorities in Room151’s annual treasury and finance survey expressed split opinions on whether borrowing short during the low interest rate period was a “prudent” strategy, with nearly 35% voting that it wasn’t.
The survey of more than 100 section 151 officers, treasury managers, finance directors and other senior finance professionals across Great Britain showed that 34.6% of respondents thought that adopting a borrowing strategy of “rolling over” short-term loans was “not prudent”.
However, 26.8% of participants voted that the strategy was “prudent”, whilst the remaining 38.6% of respondents suggested that “it depends” and gave a written response.
This comes as authorities such as Guildford and Surrey Heath have reported that they are struggling to cover the costs of refinancing their short-term loans.
The results of Room151’s annual treasury and finance survey were announced by Kelly Watson, head of local government relationships at CCLA Investment Management, at the Local Authority Treasurers’ Investment Forum and FDs’ Summit last week. Responses were received by 127 local authorities, which included a mix of district (33.9%), county (11%), city (3.2%), unitary (17.3%), London borough (11%), other borough (11%), metropolitan borough (7.1%), combined authority (0.8%) and police/fire/transport/other (4.7%).
Mixed borrowing strategy
In the explanations received, many respondents suggested that it wasn’t “prudent” to have a borrowing strategy solely based on short-term loans and instead councils should opt for a mixed borrowing strategy of short-term and long-term loans.
One participant said: “It is a risky strategy to rely solely on short-term loans. It is better to have a spread; we adopted a strategy of matching some loans to dates of when we expect to generate capital receipts.”
In addition, some participants suggested that whilst borrowing short was a “sensible strategy for a long time”, authorities should have had a greater understanding of the risks and implications of the loans.
“[Borrowing short] was the right call until such time as base rate rises became more than a possibility or the risk in the portfolio became excessive in terms of the entire portfolio.
“At threat point, risk should have been taken off the table to the degree the authority was comfortable with. This of course needs to be balanced within the revenue envelope for treasury management costs and sufficient provision should have existed to enable this swap from short-term to long-term funding,” a participant said.
Exit strategy
Many participants also acknowledged that when an authority undertook this borrowing strategy, it should have also focused on an exit strategy or plan if interest rates were to rise.
“With hindsight, no, this was not a prudent strategy, however given the foresight of hindsight we would all most likely do things differently, therefore we must look at the information authorities had at the time.
“At the time, given the very low rates being offered it would have been somewhat illogical to lock into longer term, particularly, higher rates. Equally I don’t think it’s unreasonable to have asked for treasury managers, senior officers and treasury advisors to think a lot more about the question of what to do if rates rise, as it was inevitable that they would do so and indeed have done so,” another survey participant said.
In line with advice
Some respondents of the survey stated that adopting the borrowing strategy of “rolling over” short-term loans was in line with the advice provided to them by local government treasury advisors.
In regard to this comment, Nazmin Miah, director at Link, told Room151: “Our central case forecast shows long-term borrowing rates to fall as inflation reduces and currently all PWLB certainty long-term rates are significantly above our trigger level.
“Borrowing strategies are reviewed in this context taking into account affordability and sustainability over the long term. Overall, better value can generally be obtained at the shorter end of the curve and short-dated fixed LA to LA monies should be considered, subject to sufficient liquidity in the market.
“Temporary borrowing rates will remain elevated for some time to come but may prove the optimum bridging funding option whilst the market continues to wait for inflation, and therein gilt yields, to reduce later in 2023 and then in 2024.”
David Green, director at Arlingclose, told Room151: “Over the long-term, short-term borrowing at close to base rate is still going to be cheaper than long-term borrowing at PWLB rates.
“There will be some periods in the economic cycle where that doesn’t hold true, so borrowers should set a limit on their total amount of short-term borrowing. But without the benefit of hindsight, local authorities with a sensible proportion of short-term loans made the right decision at the time.”
Surrey Heath’s ‘risky, short-term loans’
Just this month, Surrey Heath Borough Council warned that it faced “effective bankruptcy” in the next two to three years as a result of costly commercial investment, which has left the authority in “huge debt”.
In 2016, the authority purchased the shopping centre complex The Square and the House of Fraser department store in Camberley for a combined total of £113m using short-term loans.
Surrey Heath has warned that due to the “risky, short-term loans” its debt repayments could be increasing by around £1.4m per year.
Alongside Surrey Heath, Guildford Borough Council warned in July that the authority could face a section 114 notice in the future due to the increased cost of financing its £300m borrowing debt.
A report outlining the council’s financial position stated that a “significant element” of its capital programme used short-term funds rather than external long-term borrowing from the Public Works Loan Board. This has unfortunately become a “high-risk strategy that has not adjusted to current and projected interest rates” and contributed to the authority’s difficult financial situation.
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