A complex loan arrangement which last year threatened to blow a hole in Lancashire County Council’s reserves has been paid off.
A meeting of the authority’s audit, risk and governance committee heard that the council repaid the £50m Lender Option Borrower Option (LOBO) loan when the chance arose late last year.
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The deal was entered into back in 2010, but the way in which it was registered on the council’s books was questioned by independent auditors last summer. Final approval of County Hall’s accounts was delayed as a result.
When audit company Grant Thornton queried the accounting method, the council’s chief executive, Angie Ridgwell, warned that any change would have a “significant impact” on County Hall’s reserves. She also suggested that the implications for local authorities with similar deals would be so severe that half a billion pounds would be wiped off council balances across the country.
After a month-long delay, auditors concluded that Lancashire County Council’s approach was acceptable.
Mike Jensen, the authority’s director of investment, told councillors that the LOBO had now been cleared on favourable terms.
“We saw a very beneficial mechanism of repaying the loan in December - so we took advantage of...very pleasing terms which will be laid out in future data. Importantly, [the LOBO] is no longer on our books,” he said.
LOBO’s came to prominence local government during the 2000s and the most basic deals involved fixing the interest rate paid by a borrower until various points in the life of the loan. The borrower then had the option to buy out the loan if they did not want to pay the changed rate - but that often meant paying hefty exit fees to end the deal.
Lancashire County Council’s LOBO was a rarer version, which tracked the market interest rate - but then moved the rate charged to borrowers by a corresponding amount in the opposite direction. That was of benefit to councils during periods of high interest rates, but the arrangements came under the spotlight in 2015, when it emerged that several councils had been left locked into costly deals as rates fell.
Elsewhere, the council’s audit committee heard that a policy of funding capital investment with short-term borrowing had been “very successful” in the decade since interest rates plummeted following the financial crash. Although the authority does not forecast significant increases in the cost of borrowing, it is keeping the option of longer-term fixed rate loans “under consideration”.
Meanwhile, County Hall’s level of investments has reduced as the authority has increasingly had to make use of reserves to cover day-to-day spending.