Council bonds agency prices maiden £350m issue at spread of 80bps

News05 Mar 2020Luke Cross

A municipal bonds company set up as a new source of debt funding for councils across the UK has priced its maiden £350m deal at 80 basis points over SONIA, raising the money in the name of an Aa3-rated local authority.

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Council bonds agency launches maiden bond with guidance at 85bps #ukhousing #socialhousingfinance

A UK municipal bond company set up to raise debt for councils across the country has launched its maiden bond issuance with an indicative spread of 85 basis points #ukhousing #socialhousingfinance

The UK Municipal Bonds Agency (UKMBA) – an initiative that has been more than five years in the making – had gone out to the markets with indicative pricing of 85bps, which tightened after the deal was oversubscribed and £700m of bids came in.

The UKMBA had been biding its time, following a reported pause in the capital markets as investors reset amid the volatility sparked by the spread of coronavirus.

But today (Thursday 5 March 2020) it priced the five-year, unsecured floating rate deal on behalf of Lancashire County Council, issued in the name of the local authority and using its Aa3 credit rating.

The council acted as a guarantor to the issuance, providing the benefit of a credit underpinned by the UK sovereign.

The bond was priced over SONIA, which is set to replace Libor as the primary interest rate benchmark in sterling markets, with the aim of raising between £250m and £300m.

It had been pitched as a precursor to the vehicle’s first guaranteed bond for a group of councils, which is expected this spring.

The aim remains to offer pricing “well below” the Public Works Loan Board (PWLB), the traditional borrowing route for councils. This ambition has been helped considerably by HM Treasury’s decision to increase the PWLB rate by 100 basis points in October last year.

UKMBA had announced its investor roadshow in the middle of February. Since then, the financial markets have been rocked by the spread of the coronavirus, albeit with the debt capital markets returning to action this week.

According to the Financial Times, corporate bond sales have begun resuming after a week-long hiatus, with more than a dozen deals announced globally on Wednesday morning (4 March).

The funding will be provided to Lancashire County Council as a loan, which it is planning to use in part to refinance its short-term debt.

HSBC, Barclays and Bank of America are joint bookrunners on the deal, which was issued through the UKMBA’s special purpose vehicle, UK Municipal Bonds Agency Finance Company DAC.

UKMBA’s first issuance comes amid reports of an influx of local authorities looking to the private placement and bilateral loan market as an alternative to the PWLB.

The capital markets have become more attractive for councils, after the Treasury decided in October to add 100 basis points to the rate at which they can borrow from the PWLB, moving the total cost of borrowing to 180 basis points over gilts.

UKMBA also moved away from local authorities having to jointly and severally guarantee the bonds issued. Councils are instead expected to guarantee proportionately to how much they borrow.

PFM Financial Advisors, which operates similar services for local government in North America, was appointed by UKMBA in October.

Sir Merrick Cockell, chair of the UK Municipal Bonds Agency, said: “This issuance represents a hugely significant moment for local authority funding. We’re thrilled to be able to provide UK councils with an accessible and affordable financing option, that’s tailored to their needs.

“Ultimately, our goal is to provide a supplementary option for councils, alongside the PWLB, to allow them to manage their finances and raise funds effectively and efficiently. Doing so ensures local authorities have the flexibility and capacity to continue to deliver for residents, providing vital local services that materially impact on people’s lives.”

Mike Jensen, director for investment at Lancashire County Council, said his authority had offered long-standing support of the UKMBA since its inception.

“This proves the concept, long mooted, that municipal bonds have a key role to play in providing councils with another fundraising tool, offering an important alternative to established channels.

“We look forward to continuing our work with the UKMBA in future.”

The UKMBA team had previously described new housing association bond aggregator MORhomes as an “exemplar” for its model, as a sector initiative that is owned by housing associations.

Adrian Bell, vice-chair of UKMBA, was involved in its inception and also advised on the creation of MORhomes.