Daniel Omisore of the London Borough of Brent and David Moore of Bevan Brittan (pictured on main site) outline why a private placement made sense for the council and why a growing number of local authorities may take this route
In the wake of the COVID-19 pandemic, local authorities are being looked on to help reignite the construction industry and continue to battle the housing crisis. The combination of the Public Works Loan Board (PWLB) rate rise in October last year and the ongoing consultation on future lending terms have cast uncertainty over where local authorities will source finance for these ambitions.
Private placements, which were to key to financing development post-war, once again appear to be ticking the boxes for a growing number of authorities, most recently the London Borough of Brent.
Brent’s success story
Having secured internal buy-in and appointed specialist legal and financial advisors, Brent underwent an analysis of its debt financing options. Even prior to the PWLB rate rise, the value for money offered by a private placement coupled with the ability to forward-fix made it the best option for the authority.
Brent completed its private placement issuance in March 2020 following some careful planning and interaction with investors. The notes priced well below the PWLB rate and were oversubscribed, despite a turbulent market, allowing the authority to double its issue to £80m.
This issuance has already been put to good use in funding important local housing projects and is the first of several planned PPs by Brent, which will be used to deliver a substantial capital programme over the coming years. Key to Brent’s success was the positive interaction with investors to educate them about the local authority sector and the council itself: its plans and key drivers.
While a local authority private placement is similar in its structure to those issued by registered providers, there are some key areas of note.
Section 13 of the Local Government Act prohibits authorities from securing their assets. A secured investment is still achievable through the use of a subsidiary, however some investors who understand the insolvency risk prefer a direct investment without the limitations of ringfencing assets.
Non-existent in most existing local authority borrowing and difficult to apply a fair test that can withstand up to 50 years of governmental change. Instead of imposing unrealistic requirements, investors are getting comfortable with a ‘most favourable lender’ provision that ensures their requirements raise to meet any stricter parameters agreed by the authority with another lender.
Section 114 notices
Issued in accordance with Section 114 of the Local Government Finance Act 1988 when an authority has concerns over its ability to ‘balance the books’. The issue of a 114 notice alone is not indicative of non-payment and issuers should be careful to ensure that it is not made an event of default in its own right, which would expose an authority to punitive ‘make-whole’ requirements.
Reorganisation and insolvency
While a local authority can technically be made insolvent, it is regimented by the requirements of the prudential borrowing regime and there exists a significant incentive for central government to reorganise or step in to solve any solvency issues. As with registered providers, this makes investment in a local authority a low-risk venture ideal for an institutional investor looking for safe havens for its pension funds.
Where a local authority is reorganised and the new entities’ underlying asset value is broadly the same or greater, an investor should have no right greater than to be compensated ‘at par’ as part of a voluntary termination. Where the asset value reduces, an investor will want the same rights with ‘make-whole’ requirements.
The 2003 Local Government Act restricts local authorities borrowing in anything other than sterling without Treasury consent. This limits their ability to deal with US investors who would normally pass currency risk and require an authority to enter into a swap indemnity letter. US investors are getting around the issues through the use of UK-based funds or councils structuring investment in wholly owned subsidiaries.
More to come?
Local authorities are now taking more time to consider their options in what is becoming an increasingly diverse funding market. In addition to private placements, a number of banks are producing products to compete with the PWLB and the UK Municipal Bond Agency has made its terms more palatable through the removal of the joint and several liability provisions. Ultimately the outcome of the PWLB consultancy and flex in its rates are likely to be the main factors considered, but in the meantime private placements are once again a firm option for financing local authorities’ plans.
David Moore, partner, Bevan Brittan; and Daniel Omisore, deputy director of finance, London Borough of Brent
A private placement is a written 'IOU' committing the issuer to repay an investor(s) with interest at the end of a set term.