Magazine article Public Finance

Councils 'Need Bond Guarantees'

Magazine article Public Finance

Councils 'Need Bond Guarantees'

Article excerpt

Local authorities have been warned that they will need to guarantee each others' debts if a new local authority bond agency is to get the top credit rating needed to make the plans viable.

The Local Government Association is set to announce its proposals for the collective agency in January. This could act as a focal point for council plans to raise new funds from the markets for the first time in nearly two decades.

Such a scheme would be similar to those already operating in Europe.

A senior figure in one European scheme told Public Finance that UK authorities would need to provide an explicit crossguarantee of the agency's debts.

Esa Kallio, the executive vice president of the Finnish credit institution for municipal authorities, MuniFin, said that councils 'would have a much better story to tell' investors with such an agreement. It should be a 'musf to get the top triple-A rating, he said.

LGA programme director for finance Mark Luntley has said such a rating would be a necessity for the scheme.

Kallio added: 'The guarantee is the only way that you could transfer the triple-A rating of the sector to investors. Without it this would be very difficult nowadays.'

However, concerns have been raised about the legality of such arrangements, which have never been put in place in the UK before, and which may not be legal under current legislation The government has been called on to clarify whether councils would be allowed to enter into a cross-guarantee agency.

MuniFin is majority owned by its members, which include 328 of the 336 Finnish municipalities.

The company has euro12.6bn of loans outstanding and can make as many as 250 bond transactions a year. Money raised can then be loaned to local authorities for investments such as infrastructure. This is a structure that the UK agency would look to mirror.

Kallio said advantages for councils include loan rates offered 'much lower than what the banks are able to offer'.

The member municipalities are jointly liable for MuniFin's commitments to investors - if one member fails to meet its obligations, then all other members must make up the shortfall. Kallio said that although this has never been used, without a cross-guarantee of funding obtaining backing for bond issues 'would be a difficult job'.

'This guarantee is for payments to the investors. The municipalities are not responsible for agreements between MuniFin and the municipalities, but we have to cover funding to the investors. …

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