Municipal bond market reopens

THE municipal bond market reopened yesterday after a 12-year gap with new issues of pounds 100m for the City of Salford and pounds 80m for Leicester City Council.

This is the first time local authorities have issued long-term bonds since a City of Birmingham loan in 1982.

The Government made borrowing from the Public Works Loan Board much more attractive during the 1980s, which squeezed out bond issues. But a new government policy of rationing long-term loans by the PWLB has persuaded local authorities to look elsewhere.

The 25-year sterling loan stocks follow a government statement last month confirming that there would be no legal problems for lenders such as those that hit the swaps market in the wake of the Hammersmith and Fulham case.

The bonds were launched by UBS, which began discussions in autumn 1992 with the Government to win approval for new issues and establish that they would be intra vires, which means the deals could not be declared void if there was a default.

The loans will reduce the amount of gilts the Government has to sell to finance the public sector borrowing requirement, pound for pound, because the PWLB's own financing needs will be lower.

But the cost to the two councils is slightly more - with an interest rate of 7.25 per cent, including commissions of 0.625 per cent.

This compares with 7.125 per cent currently charged on long- term loans from the PWLB, which UBS said was a small difference to pay for the advantage of being able to borrow at a time when the availability of PWLB loans had been reduced. The cost of the part-paid issue is 0.6 per cent above an equivalent long gilt.

Len Harwood, managing director of UBS, said: 'It is our aim to restore confidence in this market with these issues and to develop a deep and liquid market for local authority stocks.' He said the issue had been 'more than oversubscribed' and he expected more.

Alan Westwood, treasurer of Salford, said the issue allowed the council to lock in savings of pounds 2.1m a year for the next 25 years.

Don Grant, director of resources at Leicester, said it was borrowing for 25 years because it saw current low interest rates as offering excellent value. The money will repay shorter-term debt and finance capital spending, the two councils said.

The PWLB share of local authority long-term lending has risen from 40 to more than 90 per cent over the past decade.