Cockell: the municipal bond agency has “never been so busy”

Sir Merrick Cockell, chairman of the UK Municipal Bonds Agency (UKMBA), told LGC the agency has never been so busy with new prospects, despite recent speculation about its future.

The UKMBA, which is owned by the Local Government Association and 56 shareholders on the board, was formed in 2014, but only issued its first two bonds last year, both on behalf of Lancashire CC, raising a total of £ 600million for the board.

The agency said this gave Lancashire access to cheaper borrowing rates than the Public Works Loans Board could offer, saying the council would save more than £ 20million over five years through the only first obligation. However, in June, the UKMBA’s annual report noted that the 1% PWLB rate cut last November had “made the loan market more competitive.”

The paper adds that due to the “complex and changing” bond market, “future UKMBA bond issues may not be possible if competitive margins are not achievable.” There was therefore “a significant uncertainty likely to cast significant doubt on the ability of the company to continue operating”.

Speaking to LGC, Sir Merrick, former chairman of the Local Government Association and head of Kensington & Chelsea RBC, was optimistic about the agency’s prospects. As he and the agency director signed the annual report, he commented: “The auditors have their point of view and they express their point of view… but that doesn’t necessarily mean that we agree with them. .

He suggested that auditors had shown particular zeal given the agency’s current position, which has recently “gone from sort of theoretical to operational.” And he observed that auditors are generally “very picky and challenging” because of the national focus on rebuilding confidence in the profession. Sir Merrick pointed out that “these are not qualified accounts, they are fully signed accounts”.

Business, however, appeared to stutter after the PWLB’s announcement. Plans for the agency to issue a bond for Warrington MBC were canceled in December. And there has been no further announcement on plans for a joint bond, after Barnsley MBC and Westminster City Council were named participants in such an initiative in April 2020. When LGC asked the UKMBA for a update on this, he simply responded by saying that “work is underway on mutual bonds”.

Sir Merrick said the decision to abandon Warrington’s plans was “the wise thing to do at this point”. But he says the fact that the two Lancashire bonds are trading below PWLB rates in secondary markets is “pretty good proof” that the UKMBA’s offer remains competitive..

“We have never been so busy with important live opportunities,” he said. The agency is “actively working on several of them at the moment”, and hopes that at least one of them will come to fruition before the end of 2021. A viable long-term business model would involve the issuance of four bonds worth around £ 250million each per year. .

Sir Merrick hopes the ongoing discussions will lead him to “secure a common bond” before the end of the year – but he acknowledged that this process is more difficult due to the need for a group of authorities “who are ready to borrow at the same time for the same period ”.

The markets’ wait for bonds of at least £ 200-250million means the agency will never replace the PWLB as a routine borrowing source. But Sir Merrick has said he can come up with more sophisticated arrangements for larger projects – with availability of money on schedule – or to refinance existing loans, for example.

Further, he predicts that environmental, social, and governance (ESG) bonds are “likely a key commodity” going forward, claiming that the “strong interest” in capital markets for such commodities would allow municipalities to further rate. lower. He claimed that at present, a board borrowing £ 100million over 25 years through the agency would save around £ 2.2million compared to PWLB loans, or £ 2.9million. pounds sterling if it was an ESG bond.

“A lot of what local government does fits very well into the ESG rating” in improving people’s lives or environmental sustainability, he said – including any potential links the agency is discussing currently. “If you can borrow cheaper on that basis, then the question is, why wouldn’t you? “.

But could the growing attention to the financial difficulties of advice have an impact on investor confidence?

“There are local authorities in financial situations that we could not and would not want to lend at the moment, but frankly it always has been,” said Sir Merrick. “But there are also extremely strong, well-managed and financially experienced local communities. “

He argued that if “any organization has the potential to have problems,” the key question is, “Can you show that they are doing it? The local government does this, and it always has ”.

He gives the recent example of Northamptonshire, where two viable Unitarians emerged from the ashes of the previously struck County Council, as an example of how “you can change things – and in fact it’s a sign of strength, I would say. , for the sector “.

While other countries have a long history of municipal bonds – Denmark’s equivalent agency started in the 1890s – Sir Merrick acknowledged that UK markets were still learning and there was work to be done. what to do to ensure investors are not “scared” by headlines stating that a board is “bankrupt or bankrupt”.

“No local authority in the history of local government in this country has ever defaulted and gone bankrupt,” he said. “It is a fact.”

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