Sir Merrick co*ckell, chairman of the UK Municipal Bonds Agency (UKMBA), has told LGC the agency has never been busier with new prospects, despite recent speculation about its future.
The UKMBA, which is owned by the Local Government Association and 56 council shareholders, was set up in 2014 but only issued its first two bonds last year – both on behalf of Lancashire CC, raising a total of £600m for the council.
The agency said this had enabled Lancashire to access cheaper borrowing rates than the Public Works Loans Board could offer, claiming the council would save more than £20m over five years through the first bond alone. However, in June the UKMBA’s annual report noted that the lowering of PWLB rates by 1% last November has “made the lending market more competitive”.
The document added that due to the “complex and changeable” bond market, “future UKMBA bond issues may not be possible if competitive margins are unachievable”. There was therefore “a material uncertainty that may cast significant doubt on the company’s ability to continue as a going concern”.
Speaking to LGC, Sir Merrick, formerly Local Government Association chairman and leader of Kensington & Chelsea RBC, was bullish about the agency’s prospects. While he and the agency’s director signed the annual report, he commented: “Auditors have their view, and they state their view…but it doesn't mean we necessarily agree with them.”
He suggested that the auditors had shown particular zeal based on the agency’s current position, which has recently “gone from sort of theoretical to operational”. And he observed that auditors generally are being “very challenging and questioning” due to a national focus on restoring trust in the profession. Sir Merrick emphasised that “they're not qualified accounts, they’re fully signed off accounts”.
Business, however, has appeared to stutter following the PWLB announcement. Plans for the agency to issue a bond for Warrington MBC were cancelled in December. And there has been no further announcement on plans for a pooled bond, after Barnsley MBC and Westminster City Council were named as participants in such an initiative April 2020. When LGC asked the UKMBA for an update on this, it responded simply to say that “work is ongoing on pooled bonds”.
Sir Merrick said the decision to drop the Warrington plans was “the wise thing to do at that point”. But he says the fact that the two Lancashire bonds are trading below PWLB rates in secondary markets is “pretty good evidence” that the UKMBA’s offer remains competitive.
“We've never been busier with significant live opportunities,” he said. The agency is “actively working on several of those at the moment”, and hopes for at least one to come to fruition before the end of 2021. A viable long-term business model would involve issuing four bonds worth about £250m each a year.
Sir Merrick hopes the current discussions will lead it to “get a pooled bond away” before the end of the year – but he acknowledged this process is more difficult because of the need for a group of authorities “who are ready to borrow at the same time for the same period”.
The expectation of markets for bonds to be at least £200-250m means the agency will never replace the PWLB as a routine source of borrowing. But Sir Merrick said it can offer more sophisticated arrangements for large projects – with the availability of money tailored to the timescale – or for refinancing existing borrowing, for example.
In addition, he predicts that environmental, social and governance (ESG) bonds are “likely to be a key product” in future, saying capital markets’ “strong interest” in such products would allow councils even cheaper rates. He claimed that at the moment, a council borrowing £100m over 25 years through the agency would save about £2.2m compared to PWLB lending, or £2.9m if it was an ESG bond.
“So much of what local government does fits very nicely into the ESG classification” by improving people’s lives or environmental sustainability, he said – including all the potential bonds the agency is currently discussing. “If you can borrow cheaper on the basis of that, then the question is, why wouldn't you?”.
But could the increasing focus on councils’ financial difficulties impact on investor confidence?
“There are local authorities in financial situations that we could not and would not lend to at the moment, but frankly that’s always been the case,” said Sir Merrick. “But there are also extremely strong, well run, financially experienced local authorities.”
He argued that while “any organisation has the potential to have problems”, the key question is: “Can you show that they get out of those problems? Local government does that, and it has always done that”.
He gives the recent example of Northamptonshire, where two viable unitaries have emerged from the ashes of the previously stricken county council, as an example of how “you can turn things around – and actually that's a sign of strength, I would say, for the sector”.
While other countries have a longer history of municipal bonds – Denmark’s equivalent agency launched in the 1890s – Sir Merrick acknowledged that UK markets are still learning, and that there is work to do to ensure investors are not “spooked” by headlines declaring that a council is “bankrupt or going bust”.
“No local authority in the history of local government in this country has ever defaulted and gone belly up,” he said. “That's a fact.”
