Borders council on 'toxic' loans database

EXCLUSIVE by DOUGLAS SHEPHERD

Local authorities with high-risk LOBO loans are being urged to reschedule their debts to save billions of pounds in interest charges amid calls for a sweeping inquiry into treasury management within the public sector which saw 240 councils signing up for the controversial funding system.

Scottish Borders Council was among those authorities which brokered loans from a number of banks in the early years of the Twenty-first Century. In some cases the LOBO arrangements can run for up to 70 years before the debt is paid off.

A profile of the Borders situation is included on a new national database assembled by the action group Research for Action which is campaigning for councils to exit their high interest LOBO agreements and source money instead from the UK Government's Public Works Loans Board (PWLB).

LOBO is a long-term loan, typically 40-70 years. The acronym stands for “Lender Option Borrower Option”. The lender’s (bank’s) option is to change the interest rate at pre-agreed call dates (e.g. once or twice a year). The borrower (the council) can then repay the loan in full or agree to the new interest rate. The borrower can only use their option when the lender uses theirs. Should the council want to exit the loan on any other occasion they will have to pay breakage fees at the discretion of the bank.

According to the database Scottish Borders Council currently has nine LOBO loans totalling £35 million, including loans that have had their option removed by the bank. The Borders authority is 107th out of 210 in the ranking of councils with the most LOBO debt.

In total SBC took out 11 LOBO loans worth £43 million. But figures obtained by Research for Action via Freedom of Information shows the council exited two of the agreements in 2018 after handing over exit fees.

The database includes the following information: "Scottish Borders is currently paying £1.49 million in interest per year. It is projected to spend at least £58.64 million in interest payments over the remaining term of the loans, the last one ending in 02/10/2066.

"The interest rates for Scottish Borders Council’s LOBO loans are between 3.750% and 4.990%. Currently, councils can borrow from central government (via the Public Works Loans Board) at much lower rates (between 1% and 2.5%) and on much more favourable terms." 

The campaign group discovered that councils have successfully exited at least £1.6 billion from 'expensive and risky' LOBO loans since monitoring began in 2015.

In the case of SBC the decision was taken in July 2018 to exit two £4 million LOBO loans held by KA Finanz. Interest rates on the loans at that time were 4.8% and 4.99% respectively.

The statistics show that remaining interest payments of £5,859,419 applied on one loan and £3,805,524 on the other, a total of £9.664,943. The council paid exit fees totalling £2,807,412 to KA Finanz to terminate the agreements.

Research for Action claims: "You can see how much a council saved exiting a loan by comparing the penalty fee with the remaining interest at the time of exit. You might wish to suggest to councils who still have LOBO loans to negotiate good exit deals".

All of SBC's loans were arranged over a period when the council's treasury management advisers were a firm called Butlers, a division of ICAP Securities Ltd. at that time.

Research also shows that one of the LOBO loans was brokered by ICAP Securities while two ICAP directors were also on the board of Garban Intercapital PLC, another of the brokers involved in the Borders transactions. 

The database shows the brokers' fees paid in setting up all eleven LOBO loans were "missing" from information gleaned via FOI. In 2011, Butlers was acquired and merged with Sector Treasury Services Ltd.

Joel Benjamin, a researcher involved in the LOBO investigation, said: "Our figures confirm after years of citizen-led pressure, local authorities can save millions of pounds by refinancing toxic bank debt, with low risk, low interest, loans from the Treasury PWLB."

He added: "A root and branch inquiry of council treasury management practice is required, to understand why borrowing and investment in the public interest appears  to be the exception, not the rule".

Ludovica Rogers, database project lead, said: "Our new database is the first comprehensive, publicly-accessible depository of information about LOBO loans. We hope it will enable more UK councils to exit the loans, restoring public accountability and reclaiming public money for much-needed local services."

The research shows that 95% of outstanding LOBO debt is now owed to European Banks, with councils projected to pay at least £14bn in interest payments until the loans end.

Here are the details of SBC's existing LOBO loans as they appear on the Research for Action website:

NOTE: The table shows the name of each bank, the sum borrowed, the year the money was drawn down, the number of years left on the loan, the current interest rate, the annual interest payments and the estimated remaining interest to be paid.

Barclays       £6 million    2005    44  4.4%       £264,000             £11,616,000

Commerz     £2 million    2007    16  4.99%     £99,800               £1,596,000

Dexia           £5 million    2005    44   3.75%     £187,500             £8,250,000

Dexia           £5 million    2005    45   3.8%       £190,000             £8,550,000

Dexia           £5 million    2005    45   3.82%     £191,000             £8,595,000

Dexia           £3 million    2004    33   4.5%       £135,000             £4,455,000

Dexia           £3 million    2004    33   4.5%       £135,000             £4,455,000

Dexia           £3 million    2004    33   4.5%       £135,000             £4,455,000

Erste            £3 million    2006    45   4.938%   £148,140             £6,666,300

TOTALS    £35 million                                      £1,485,440         £58,639,100