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adds. The appointment of former LGA leader Sir Merrick Cockell as
the LCFC chair in January to lead the first issue has helped further.
‘As the first issuance and the second issuance is successful, that is
what will galvanise most local authorities [to join],’ she says. ‘I don’t
think it will take long. If you think about how local government tends
to work, you have a significant number of authorities that are
moving the agency forward, and then success convinces others.’
Brady agrees that once the bonds company is established and
demonstrates it can provide cheaper borrowing than the PWLB,
more councils will want to borrow from it. Eventually, the aim is for
the majority, if not all, councils to become shareholders of the firm,
he reveals. When it is able to demonstrate savings versus the
PWLB, it could become the first point of call for a local authority
wanting to borrow.
‘For the agency, we are already in a strong position with nearly 50,
and building, councils either shareholders or committing to become
shareholders,’ he adds. ‘The broadest sector involvement further
strengthens the agency and makes us a more attractive
counterparty for funding providers.’
As well as getting formal commitments from councils to sign up to
agency processes – which include a proposed guarantee where
councils provide collective backing of their fellow borrowers’
obligations – a key final step before any issue is for LCFC to
receive a credit rating. Brady was anticipating that work to get a
rating will begin in ‘short order’ as PF went to press.
Matt Thomas, a director in debt capital markets at Barclays
Corporate, is following the agency’s development. He says that
achieving a good rating is critical to providing the cheaper
borrowing sought by town halls.
‘The key objective here is trying to achieve pricing that is as
favourable as possible versus the PWLB,’ Thomas tells PF. ‘To do
that they will need at least a single credit rating, and in an ideal
world multiple agencies – the stronger the credit rating backdrop,
the better in terms of the ultimate spread outcome.’
An issue in April would coincide with the peak borrowing month for
the PWLB, but it is vital to get the credit rating firms comfortable with
the structure of the agency, he adds, including the crossguarantee.
The business case for the agency stated this level of security for
investors could reduce interest rates charged by as much as one
third compared to the PWLB certainty rate, or about 25 basis points.
With this structure in place, Thomas says the initiative will come into
its own once a large number of councils are involved, as the scale
of local government can drive down borrowing costs.
‘We’re hoping that the credit agencies will take significant comfort
from the diverse borrower base within the agency and recognise
the strong internal credit processes being put in place. It’s also
important to remember that the UK Government sits behind the
whole sector via the PWLB.
‘Once it gets to the critical mass of borrowers within the agency,
each individual name within the agency is less important. Strength
is very much in the diversity of numbers – as it grows, bond
investors will become less focused on the individual constituents of
the agency and more comfortable with the guarantees in place
between its members.’
As well as being the start of the financial year, April will also be the
peak of the general election campaign, which Brady acknowledges
as a potential factor in any issue as the market quietens towards
the vote.
However, he concludes: ‘I’d certainly like to get something done in
that timeframe. We still have some work to do, but equally we want
to get going, we don’t want this to be an academic exercise. We
want to start delivering cheaper finance to councils.’
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