Concern over high-cost loans

Report by Tim Parsons Waltham Forest Council is the latest local authority facing scrutiny over its use of high-cost loans for raising capital finance. […]By Tim Parsons

Waltham Forest Council is the latest local authority facing scrutiny over its use of high-cost loans for raising capital finance.

Campaign group Debt Resistance has been opposing so-called LOBO loans (short for ‘lender option, borrower option’) after describing them as a “gamble that councils are guaranteed to lose”.

In Waltham Forest the council took out eight such loans worth around £45million between 2002 and 2012, although with additional ‘breakaway’ costs of potentially £98m the final repayment figure will depend on negotiations with Barclays and four overseas banks.

Last summer local resident Josef Davies-Coates formally objected to the council’s 2017 budget. In his notice of objection to accountants KPMG, under the Audit and Accountability Act 2014, Joseph claimed LOBO loans were “unlawful”, “unreasonable” and “irrational”.

Josef told the Echo: “I became aware of LOBOs; their bad value, their utter insanity. I figured it was my public duty to object.”  

LOBOs were the subject of a Channel 4 documentary in 2015, How councils blow their millions, as well as a Parliamentary inquiry. In 2017 Newham Council ended its own loans – worth five times more than Waltham Forest’s – citing the need to “safeguard council tax from future increases”.

There are still 240 councils in the UK holding LOBO loans, with local authority finance officers frequently believing them a good deal. Joel Benjamin, a researcher at Debt Resistance, disagrees. He told the Echo: ‘‘Exiting a LOBO is nearly three times more expensive than a PWLB [Public Works Loan Board] loan, which currently lends at a rate of 1.5 to 2 percent. The LOBOs’ duration is 40-70 years as opposed to PWLBs’ 30-50 years.

“Banks should be forced to waiver breakaway costs on LOBOs, enabling councils to refinance at today’s lower rate. Council taxpayers would save millions of pounds nationally.”

Joel claims LOBO lenders could reset and raise the interest rate up to 5.15 percent, which the council could only avoid by paying excessive breakaway costs. He adds that banks stand to make around £2billion in profit from LOBOs of £15bn as councils “miscalculate” the risk of mounting loan payments.

Following his objection, KPMG wrote back to Josef, recognising his right to object and stating that it would now “collect the documents that we think will help us make a decision on the objection”.

Waltham Forest Council denies any wrongdoing. In a statement a spokesperson said: “Our use of LOBOs is relatively small. The case for this method of borrowing is that they were beneficial compared with PWLB rates at the time that the loans were taken out and would have reduced the cost of capital financing.

“Also, we regularly review the options for refinancing loans. Although it is unlikely the LOBOs would be repaid in the current market, this applies equally to PWLB loans.

“Our total loan portfolio is £250m; of this, £45m relates to market loans (LOBOs) and the rest PWLB. Our average rate of interest on LOBOs is 4.82 percent, compared to borrowing from the government’s PWLB of 4.81 percent.”