Sunday 7 August 2016

Brent's LOBO loans at 68% premium merit deeper scrutiny

In April I published some information from Cllr Michael Pavey on the complex issue of LOBO (Lender Option, Borrower Option) loans. At the time Pavey was deputy leader of the Labour Group and lead member for finance. He confirmed that Brent Council had £95.5m in LOBO borrowing. LINK

In June 2014 journalist Ian Fraser published an article entitled 'How City banks and brokers stitched up local authorities with LOBO loans' and gave this Brent example.

Click on image to enlarge
In 2015 a Channel 4 Dispatches programme 'How Councils Blow Your Millions' revealed how banks had exploited local councils through LOBO loans and as a result a Communities and Local Government Committee inquiry was set up to examine the issue.  Bob Blackman MP was a member of the Committee.  He was leader of the Brent Conservative group on Brent Council and deputy leader of the Council when it was in coalition with Brent Liberal Democrats prior to the local elections in May 2010. The LOBOS borrowing  was arranged between November 2002 and April 2010.  Minutes of the Communities and Local Government Committee oral evidence can be found HERE

Department of Local Communities and Local Government statistics for 2015-16 showed Brent Council had total long-term borrowings of £423.7m of which £328.2m was Public Works Loan Board and £95.5m LOBOs.

The campaign Debt Resistance in covering Newham Council's massive exposure to LOBOS mentioned Brent LINK:
  At Brent Council where a similar £10m LOBO loan from RBS was analysed, it was found the council was paying £1.2m more for the loan from RBS, than if it had borrowed via the UK Treasury Public Works Loan Board (PWLB) – standard practice for councils. To exit the loan would cost Brent a further £3-4m in “break penalties  
Brent Cabinet will be receiving the 2015-16 Treasury Management Outturn Report at its meeting on Monday August 15th.  The report acknowledges the high cost of redemption of LOBOS loans:

No debt was restructured during the year and no lenders exercised options to vary the terms of loans on LOBO (Lender Option, Borrower Option) terms. The Council has borrowed £95.5m under LOBO transactions, all of which were entered into in the period November 2002 to April 2010. Unlike PWLB loans, there is no formula for the cost of redemption of LOBOs, and the price quoted would depend on any bank’s view on its commercial advantage. The banks’ positions have been insured through the derivatives markets and to renegotiate these arrangements would be very expensive. The average premium on our LOBO portfolio is about 68%: this would mean that it would cost £8.4m to redeem a LOBO with a nominal value of £5m. However, there is no established formula for the redemption price and the actual cost be higher.
The 68% average premium applied to total LOBO borrowings of £95.5m would give additional redemption costs of £65m with the possibility, as in the last sentence above, that it could be higher. It would be worthwhile for the Cabinet (or perhaps Scrutiny) to go into the issue a little deeper and particularly to explore what appears to be some complacency about the situation:

There are complex arguments made about LOBOs, by their supporters and by their detractors. The Council's position is simply that the LOBOs are part of its portfolio, and must therefore be managed as effectively as possible. There are no plans to enter into further LOBO contracts. However, it should be noted that the average rate of interest being paid on LOBOs is little different to that on PWLB debt (4.75% compared to 4.71% at 31 March) and the range of rates lower. The most expensive LOBO was at 6.234% on 31 March, compared with the most expensive PWLB at 8.875%.
Since, the end of 2015/16, Barclay’s Bank decided to give up its lender option to £15m of LOBOs. There were three loans of £5 million each, with interest rates of 3.95%, 4.35% and 4.5%, with maturities between 2048 and 2076. Barclays did this to ensure it could meet Basle III Capital Requirements that banks need to comply with by 2019. As these changes are to the borrowers’ advantages, it merely needed to notify us and provide us with the signed declaration of its change. It is likely, according to Arlingclose, our Treasury advisers, that other lenders will soon follow suit.
These are Brent Council's LOBO loans according to Debt Resistance. The tables on its website are interactive providing more information LINK:

1 comment:

Nan. said...

Have you been mis-sold LOBO?

[Couldn't resist.]