View from City Road: The long view on local bonds

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The Independent Online
After the Hammersmith and Fulham swaps nightmare, it is hardly surprising that councils are still regarded with a touch of suspicion in the City. But another quite separate local authority market is set to spring to life next week after an absence of a dozen years: Salford and Leicester are hoping to borrow with long-term bonds.

If they go ahead with their 25-year issues totalling about pounds 180m they will be the first since a Birmingham stock in 1982. With advisers UBS the two councils have been on roadshows in London and Edinburgh and have been encouraged by the response.

These bonds are old-fashioned stuff, similar to gilts, and nothing like the swaps market. But there is a link, of sorts, in that much effort has gone into reassuring investors there will be no risk of their loans being voided in some future court action against a rogue local authority.

Just before Christmas the Department of the Environment announced approval for new stock issues in terms that made this clear.

Ten years ago, 40 per cent of councils' long-term borrowing was from the Public Works Loan Board. But now the Government has authorities' long-term financing under its thumb, with more than 90 per cent coming from the PWLB, which was deliberately made much more competitive.

Detractors wonder what the advantage of bonds could be, since rates on the PWLB's long-term loans have a ceiling of a very reasonable 0.5 percentage points over gilts and there are no merchant bank fees to pay. On the other hand, long-term loans from the PWLB have been harder to get as the PSBR has soared, an incentive to councils to offer a decent price. As for the Government, every one of these bonds issued is another gilt fewer to sell.

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