Power to borrow
Local authorities in Scotland have the power to borrow money to carry out their functions. This power is given by section 69 of the Local Government (Scotland) Act 1973. It is a power which is subject to other legislation governing local authority borrowing.
The Local Authority (Capital Finance and Accounting) (Scotland) Regulations 2016 set out the purposes for which local authorities can borrow money.
The purposes are broad and include the financing of capital expenditure of the local authority.
These regulations also include various other provisions such as the requirement for local authorities to determine an “authorised limit” of external debt per year.
PWLB
The most common way for a Scottish local authority to raise finance is currently through the Public Works Loan Board (PWLB).
PWLB loans are relatively straightforward for a local authority to put in place. There is limited documentation and much of the process is done by phone and email.
However, with the recent 1% hike in the PWLB interest rates for new loans, many local authorities may be encouraged towards private financing options.
Bond issue
In 2016, Aberdeen City Council became the first Scottish local authority to complete a bond issue when they issued £370 million of bonds on the London Stock Exchange.
Bond issues are complex and time-consuming but are worthwhile to consider.
They are an efficient method to access a wide range of investors; there is scope to tailor the terms of the bonds to meet local authority requirements (e.g. for capital repayment holidays); they are good for liquidity; and the local authority may achieve pricing which is better than via other forms of finance.
Private placement
The main difference between a bond issue and a private placement note issue is that only one or two private investors subscribe for the notes and they are not listed on a public exchange.
Typical investors are large insurance companies.
Private placements have many of the same advantages as a bond issue but they are significantly quicker and cheaper to put in place.
However, the local authority will have less flexibility in achieving exactly the terms that it would want since there will be negotiation of terms with the investors.
Loans
A private loan contract with a funder, usually a bank, is another option.
To meet the specific financing needs that local authorities have, support from a bank which can provide long term finance is what should generally be explored.
As well as being able to provide a longer term lend, a bank should be able to provide a fixed rate commitment ahead of need in order to provide a local authority flexibility in its operations.
Although bank loans are likely to involve the local authority signing up to a lot of monitoring arrangements and a wide variety of covenants and undertakings, they provide benefits that other types of financing do not. For example, it may be possible to modify the terms and restructure at an appropriate juncture.
A final note
This note is only a first step in exploring the range of financing options for Scottish local authorities and some of the key advantages and disadvantages of each form of available financing.
For a more in-depth discussion about what type of finance may work best for your local authority, contact Michael Stoneham or Clare Devlin.
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