Brighton Council lives on borrowed time

Going up - and so are interest rates

Going up – and so are interest rates

The decision by Brighton and Hove City Council to borrow £36.2 million for the Public Works Loan Board to fund the building of the i360 has generated many column inches, not least by me.

But in February 2011 and February 2012, the council also borrowed money (for what we do not know, but watch this space)  from a High Street bank via a less publicised route. The weirdly named “lender option borrower option” (LOBO)  facilities have raised the eyebrows of financial experts because they contain a myriad of complicated clauses.

According to figures I obtained through a Freedom of Information request, the LOBO loan agreements from the Royal Bank of Scotland drawn down by the council within the last five years, total £30,000.

In February 2011, Brighton and Hove City Council drew down a lender option, borrower option loan from the RBS totalling £10,000. The initial interest rate is 4.22% and the loan term is 60 years. The rate will be reviewed in April 2016 and every five years thereafter.

The council borrowed a further £10,000 in the same month at a rate of 4.20% and another £10,000 in February 2012 at a rate of 4.35% under the same terms as above.

 As Private Eye points out in its latest issue, working out whether these loans are a good idea or not depends very specialist know-how. Treasury rules state that a public body “using a new or non-standard technique should ensure it has the competence to manage, control and track its use and any resulting financial exposure which may vary with time.”

It may be that the council finance department is staffed with people possessing the savvy of a supremely successful spread betting expert. Or it may not.

Time – and the markets – will tell.

 

October 16

Update: I asked the council to explain what the LOBO loans were for. They sent me this reply:

“The council had the opportunity to restructure it’s debt during a time of low interest rates in order to reduce future borrowing costs. The three tranches of £10m debt entered into in 2011 and 2012 were undertaken to re-finance cumulative capital programme investment funded through borrowing.”

The question is , of course, what happens when the interest rate goes up.

 

 

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