Posted by: John Brace | 8th September 2019

Why can’t Wirral Council refinance £44,500,000 in LOBO loans and why are 6 other councils suing the lender?

Why can’t Wirral Council refinance £44,500,000 in LOBO loans and why are 6 other councils suing the lender?

                                  

Shaer Halewood (Director for Finance and Investments (Wirral Council)) 29th January 2018

Shaer Halewood (Director for Finance and Investments (Wirral Council)) 29th January 2018

Earlier this year I made a FOI request to Wirral Council for a copy of a long running objection that has remained unresolved for years made by a local elector in relation to LOBO (Lender Option, Borrower Option) loans made to Wirral Council.

After an internal review (Wirral Council first claimed that to release the information would be unlawful), Wirral Council disclosed the nature of the objection made.

In response to a different FOI request (not made by myself in 2015) Wirral Council disclosed that it had entered into long term LOBO loans with Barclays Bank PLC of £18,500,000 + £4,000,000 + £6,000,000 + £10,000,000 + £6,000,000 (which is a total of £44,500,000).

Detailed responses to the person who made the objection by Wirral Council’s auditor Grant Thornton have been accompanied by a covering letter threatening the objector with criminal sanctions if Grant Thornton’s letters are shared with third parties (except for legal advisers).

Earlier this year a number of councils and a combined authority (Leeds City Council, Greater Manchester Combined Authority, Newcastle City Council, North East Lincolnshire Council, Nottingham City Council, Oldham Council and Sheffield Council) started legal action against Barclays Bank PLC in relation to LOBO loans made by Barclays Bank PLC to those public bodies. The Particulars of Claim details the complex reasons behind this.

Wirral Council is unable to use cheaper sources of borrowing at lower interest rates than the LOBO loans to replace the LOBO loans (interest rates paid on its LOBO loans range from 4.68% to as high as 9.18%) as if it did so it would have to pay in addition to the outstanding capital on the loan a “breakage cost” to the lender equivalent to what the lender would have received in interest had the loan not been ended early. As the LOBO loans Wirral Council have with Barclays Bank PLC have maturity dates in 2078, 2065, 2055, 2054 and 2052 this means this extra “breakage cost” can amount to nearly the size of the original loan.

The only option Wirral Council has to end the loan early without having to make this extra “breakage cost” on top of the original loan value is if the lender suggests a higher interest rate which Wirral Council rejects. However in the current financial climate lenders are highly unlikely to do this as the lenders would make more profit on the loan by allowing it to continue at the existing interest rate.

I have tried to write the above in reasonably plain English, unlike Wirral Council who include in the current draft of the 2018-19 accounts:

“The value of “Lender’s Option Borrower’s Option” (LOBO) loans have been increased by the value of the embedded options. Lender’s option to propose an increase to the interest rate on the loan have been valued according to a proprietary model for Bermudan cancellable swaps. Borrower’s contingent options to accept the increased rate or repay the loan have been valued at zero, on the assumption that lenders will only exercise their options when market rates have risen above the contractual rate.”
 

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Responses

  1. I would like to know why they need to lend in the first place, your last post told us how they have over spent in the first three months of the year, so heaven knows what that will be at the end of the year, they have a budget of around £650 million give or take a year, i don’t know what ratio the rate payer pays to the government’s hand out [ yes we know this is getting smaller each year!]
    But they can’t run little old Wirral on £650 mill a year?

    • The amount budgeted to be raised by Wirral Council through council tax in 2019-20 is £141.27 million (although there are always amounts at the end of the year that can’t be collected or haven’t been paid). There’s a similar amount that Wirral Council has budgeted to be received from business rates.

      However amount is just the part of council tax that goes to Wirral Council as opposed to the amounts that are collected by Wirral Council that then go to the Merseyside Fire and Rescue Authority, Office of the Police and Crime Commissioner (which also covers the amount to the Merseyside Police) and Liverpool City Region Combined Authority.

      The amounts borrowed by Wirral Council from Barclays Bank PLC in the form of LOBO loans were in the period 2002 to 2007 (which was before I started this blog about Wirral Council) and the senior managers involved in signing off on those loans such as Tom Sault and Ian Coleman are no longer working for Wirral Council.

      However, if you read the minutes for Wirral Council’s agreed budget for this year, the total amount expected to be received in 2019-20 for the Wirral Council element of council tax is £142,436,211. Wirral Council also expect £711,204,000 of income from other sources making a combined revenue budget of £853,240,611.

      It’s possible your ~£650 million amount doesn’t include the budget for schools (which is determined by Wirral Council) as the Schools Budget (which covers the budget for early years, maintained schools, academies, colleges and other providers) comes to £267,661,400 for 2019-20.


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