Councils save millions by renegotiating controversial Lobo loans

Four Scottish local authorities have renegotiated or are renegotiating debts with commercial banks in a bid to save millions each year in interest payments, The Ferret can reveal.

City of Edinburgh, Fife and West Dunbartonshire councils have become the first in Scotland to renegotiate a significant portion of Lender Option Borrower Option (Lobo) loans. North Lanarkshire Council is in the process of renegotiating Lobo debt.

Campaigners have welcomed the moves to save public money, which follow Lobo renegotiations by English councils. They are also calling on other councils such as Glasgow that haven’t cut the cost of their loans to take action.

Lobos can attract interest rates of up to eight per cent, far higher than the rate paid on government borrowing, which is typically around two to three per cent. Scottish local authorities have accumulated £2.3 billion of Lobo debt and repayments cost £119 million per year over 50-60 years.

Councils were initially attracted to Lobos because commercial banks, most commonly Royal Bank of Scotland (RBS) and Barclays, offered teaser rates, which means the initial interest rate paid on the loan was less than the cost of government borrowing.

But clauses in the Lobo contracts mean the banks can hike up the rate at predetermined fixed points, with councils either having to accept the new rate or pay off the whole loan.

There is no specific regulatory oversight of council Lobo lending. Following a Channel 4 documentary in 2015, a UK government inquiry into Lobos was set-up but subsequently dropped.

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The additional cost of Lobo debt repayments to cash-strapped Scottish councils is significant. In December 2018 workers’ cooperative, Research for Action, estimated that if all Scottish councils re-negotiated their £2.3 billion collective Lobo debt, they could save £67.5 million per year.

Over the lifetime of the debt this would result in a saving of £2.6 billion, more than the original loan. It is also more than the £2.4 billion annual council tax revenue that all Scottish local authorities took in 2018-19.

Edinburgh council, which had the 11th highest Lobo debt of all UK councils, confirmed that a deal had been reached with RBS to terminate four “inverse floater” Lobo loans.

These are different from conventional Lobos in that the interest rate increases when Bank of England interest rates fall. With the bank’s base rates falling to historically low levels in the decade following the 2008 financial crash, the cost of inverse floater Lobos has rocketed.

The terms of the renegotiation deal is protected by commercial confidentiality. But Research for Action, which produces research to support economic and environmental justice, uncovered the conditions of Edinburgh’s four inverse floater Lobos.

Agreed in February 2010, the contracts included “breakage fees” of £94.3 million for exiting the loans outwith pre-agreed call dates, more than double the loans’ £40 million value.

Other councils also told The Ferret that they had renegotiated their Lobos. Fife Council, which has the eighth highest Lobo debt in the UK, said it had renegotiated its £357 million loan with RBS.

West Dunbartonshire Council said that renegotiations had taken place with a commercial lender other than RBS, resulting in a reduced interest rate. The council has £93 million worth of Lobos.

North Lanarkshire Council, which has the sixth largest Lobo debt in Scotland, said that a renegotiation of its £98 million Lobo debt was “currently ongoing”.

Scotland’s three largest local authorities could make the most savings from renegotiating their Lobos. Glasgow could save over £10.7 million per annum, Fife £8.7 million and Edinburgh £7.9 million.

Those savings would be equivalent to covering the cost of nearly half of the £22.6 million cuts made to Glasgow council’s 2019-20 budget and nearly a quarter of the £33 million cuts made to Edinburgh’s budget. They would more than cover the costs of Fife’s £4 million budget cuts.

The total potential saving for Glasgow City Council is £451 million, which makes up the bulk of the £548 million pay-out to women council workers for the historic equal pay claim, agreed in January.

However, five of the top ten Scottish councils with the highest Lobo debts, including the largest, Glasgow, confirmed that they were not currently pursuing debt renegotiation. One council, Inverclyde, saved £30,000 by renegotiating a small £3 million Lobo last year, but has no current plans to pursue debt renegotiation further.

Councils yet to move on debt renegotiation are set to pay an even greater financial penalty, after the UK Chancellor, Sajid Javid, hiked the interest rate paid on Public Works Loan Board (PWLB) debt from 1.8 per cent to 2.8 per cent earlier this month.

The PWLB is responsible for government borrowing to councils. The Local Government Association estimated that the average cost of the PWLB rate hike to UK councils will be £70 million per year.

Joel Benjamin, a campaigner at Research for Action said: “For struggling local authorities and taxpayers, it’s great to see Scottish councils moving to cancel and refinance their Lobo loans, a year after English councils did the same.

“Unfortunately, the recent indefensible decision by Sajid Javid and the Treasury to hike PWLB interest rates by one per cent means those councils like Glasgow yet to cancel and refinance their Lobo debt via the PWLB will now struggle to do so.

“Scottish taxpayers should now demand a political solution to the Lobo problem that tackles the latest roadblock imposed by the Treasury.”

The move to re-negotiate Lobos by the four Scottish councils comes after Northamptonshire and Kent councils agreed a deal on inverse floater Lobo loans with RBS in October last year. Since then, every local authority in England which has inverse floater Lobos with RBS has either begun or completed re-financing negotiations, while Newham Council is suing the bank over the terms of the loan.

It’s only now that some Scottish councils have begun to pursue such a re-negotiation strategy.

Writing about Edinburgh’s renegotiation deal on CommonSpace, Green councillor Gavin Corbett, who sits on the council’s finance and resources committee, argued that Scottish councils have been “behind the curve” on renegotiating Lobos.

Corbett said the council only began to look into the problem after he raised it with senior staff at an August meeting of the council. By September, a follow up report to the committee outlined the terms they had agreed with RBS for exiting the loans.

“The Lobos story is not over, for Edinburgh or others,” said Corbett. “The inverse floater Lobos are highest profile but that still leaves another 18 Lobos at rates of around 4-5 per cent, most of which are due to run until 2065 or 2066.”

Corbett calculated that failing to renegotiate the four inverse floater Lobos would have cost Edinburgh council around £2.4 million per year. “Around what it costs to run a large primary school,” he added.

RBS has faced criticism from its own shareholders for “mis-selling” Lobo loans to councils. “We work on a case-by-case basis with all our customers and as ever, arrangements are confidential,” said a spokesperson for the bank.

“We value all our customers and are open to discussing restructuring or refinancing when circumstances change.”

Local authorities have struggled to cope with a significant reduction in their budget since the beginning of the austerity era at the turn of the decade, despite a slight recovery over the past two financial years. Debt is a growing cost on council balance-sheets.

A report by Audit Scotland in March found that in 2018-19, councils “budgeted to spend £1.2 billion, ten per cent of their budgeted net revenue expenditure, on debt repayments.”

On 12 October 2019 campaigners from the Solidarity Against Neoliberal Extremism collective organised a conference on Glasgow’s debt, which has the third highest Lobo debt of all UK local authorities. The conference agreed to co-ordinate “citizen-led research” to fully understand the council’s public finances, including Lobos.

One of the organisers, Penny Cole, said she believed it may not be the right time to renegotiate the loans, but that cancellation or a major write-down of Glasgow’s Lobos should be explored.

“The question is really are they legal – since they contain derivatives which councils are not allowed to dabble in,” said Cole. “And if it can be shown they are not, could we walk away from them or at least pay them off really cheaply with no penalties?”

What councils said on Lobo loans

City of Edinburgh Council: “While these loans formed a small part of the council’s overall debt portfolio, we have redeemed our inverse Lobo loans which will generate annual savings to the council based on the current interest environment.”

Fife Council:”There has been re-negotiation with RBS on the Lobo loan we had with them. We continually review these loans and assess the financial viability of restructuring and will do so where the opportunity arises.”

West Dunbartonshire Council: “Renegotiations have taken place with a commercial lender other than RBS, resulting in a reduced interest rate. The council actively reviews rates for current loans in conjunction with Treasury advisors and where there are favourable terms, renegotiations are undertaken.”

North Lanarkshire Council: “We consider opportunities for restructuring our existing debt portfolio in order to achieve best value for the council, some of which include this type of loan. Due to the commercially sensitive nature of these financial arrangements, it would be inappropriate to release the details of any negotiations currently on-going.”

Inverclyde Council: “The council is always looking for debt restructuring opportunities whether loans be Lobos or conventional borrowing. We are not actively pursuing any opportunities at present but did buyout one £3 million loan last year as part of the budget process following advice from our Treasury advisor.”

City of Glasgow Council: “Nothing on the go just now” on debt renegotiation.

Highland Council: “There has not been any renegotiation of terms for any existing Highland Council Lobos.”

Aberdeenshire Council: “We’re not currently planning any renegotiations – we would only consider renegotiating at specific break points within the agreed terms of a loan.”

Aberdeen Council: “The council is comfortable with its Lobo loans as they stand and is not seeking to renegotiate any of the contracts.”

East Ayrshire: “No immediate plans for renegotiation.”

This story was published in tandem with the Sunday National.

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