Friday, July 10, 2015

News: Rotherham Council's £173m LOBO loans

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Rotherham Council is trapped repaying £173m of long term commercial loans taken out before the global financial crisis at interest rates fixed above current rates.

More than 200 councils across the country have taken out an estimated £15bn of complex bank loans known as LOBOs, described by some as "exposing UK local authorities to huge risks while masquerading as a good deal for taxpayers."

LOBO stands for Lender Option Borrower Option and with fixed interest rates and expensive exit fees imposed on councils by banks like RBS and Barclays, it means that councils can't get out of these loans which can run for up to 70 years. Calculations suggest that if councils could refinance at today's rates they could save taxpayers £145m this year alone. The current Bank of England base rate is 0.5%.

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Research by campaign group, Debt Resistance UK, places Rotherham 11th out of all local authorities who replied to Freedom of Information requests using these risky loans in terms of total borrowed, with a staggering £173m borrowed since 2004.

The Council has 16 LOBO loans, including four with Barclays, three with Germany's Dresdner Bank AG (now part of Commerzbank) and three with Dexia, the state-owned Belgian-French banking institution.

As an example, paperwork shows that Rotherham Council borrowed £15m from Germany's real estate bank, Eurohypo (now also part of Commerzbank) at an interest rate of 6.88% for a period of 60 years from February 2006. The "special features" of the loan mean that the bank could alter the interest rate every six months if it gave three days notice. If the Council chooses not to accept the new rate it could prepay the loan without penalty. If the lender chooses not to alter the interest rate, the council cannot prepay the loan.

The issue was recently highlighted by Channel 4's Dispatches programme which estimated that banks made more than £1bn in upfront profits on these local authority loans and spoke to a former trader at Barclays Capital who said he had "deep moral qualms" about LOBOs and didn't feel they were "fair" on councils.

Rotherham Council, which failed its most recent external audit for not making proper arrangements to secure economy, efficiency and effectiveness in its use of resources, had borrowing activities based upon principal amounts during 2014/15 that totalled £448.883m.

With total Council expenditure at over £400m in 2014/15, the repayments are being made at a time of increasing financial pressure. £94m in budget savings have already been delivered since 2010 and a "budget challenge" of finding a further £41m in savings over the next three years has been identified.

Local authorities are permitted to borrow from the Public Works Loan Board (PWLB), a statuary body that provides loans at interest rates set by the Treasury at lower than those commercially available. Rotherham Council last used the PWLB to borrow £15m in 2012. The three loans were for between 19 and 22 years at interest rates of between 3.26% and 3.44%.

Also in 2012, another LOBO loan was arranged, this time with Siemens Financial Services for £10m over a period of ten years at an interest rate of 3.22%. It included a termination sum amounting to the full loan amount plus all accrued but unpaid interest, breakage costs and any other due but unpaid amounts.

In late 2013/14 arrangements were made through a forward deal for the Council to borrow £20m in 2014/15 from the pension fund of BAE Systems. The rate of interest on this debt is 4.05% and the loan period is 44 years.

Clive Betts, the Sheffield South East MP and chairman of the parliamentary committee which scrutinises local government, has called for an inquiry into LOBO loans and also called for the Financial Conduct Authority to investigate the behaviour of City firms that offer local authorities specialist financial advice.

Rotherham Council appointed treasury advisors, Butlers (a division of ICAP Securities Ltd) in 2005. It has since been advised by Capita Asset Services, Treasury Solutions.

Debt Resistance UK website

Images: Evans

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