Newham Council recently came to new arrangements with Barclays over the servicing of its extensive debt repayments. In press releases and statements, this re-mortgaging was presented as a good deal for the council, for Newham residents, and especially for council tax payers.
But as President Trump found to his cost over Obamacare last week, even the best deal makers sometimes get it wrong.
Rising East tried to find out the real score on Newham’s debt repayments, but encountered more obstacles than we had hoped.
The background: between 2002 and 2012 many councils took out huge loans to alleviate financial strains. Many of these loans came in the form of ‘lender option borrower option loans’, known as LOBOs. These loans are usually long term and the re-payment schedule can last for as long as 70 years.
Interest rates on LOBOs are arrived at by taking an arbitrary rate of eight percent, with current market interest rates deducted. LOBOs first became popular 15 years ago due to the higher interest rates of the time, and they served to protect councils from paying even more in interest. They were a kind of capping – effectively an insurance policy against additional rate rises. Following the financial crisis of 2008, however, interest rates plummeted, leaving many councils with anomalously high interest rates and costly exit fees dictated by the lenders, usually high street banks.
During the heyday of LOBOs Newham acquired the largest loan portfolio of any council in the UK, estimated at £578m. Last month Newham announced an agreement with lenders Barclays to switch half of the LOBO portfolio to fixed rate loans. According to the council this will save up to £94m – a figure reached by multiplying current annual interest payments by 60 years, the average loan length.
The announcement came 18 months after a Channel Four Dispatches documentary which explained that Newham had been paying interest on LOBOs at more than seven percent, while the contemporary base rate stood at only 0.5 percent.
These controversial loans have prompted protests. Rachel Collinson, a London Assembly candidate for the Green Party, wrote to PriceWaterhouseCooper asking for clarification, as a first step in her campaign to outlaw the type of loan taken out by Newham.
LOBOs even split the council, with Newham councillor John Gray having previously said that “the LOBOs skewed the council investment strategy because the council has to have bags of reserves available at each of the options dates”.
In the context of Newham Council’s announcement that it had secured a better deal for the borough by re-financing, Rising East asked some questions regarding the current repayment situation. The council’s media office replied saying that it does not deal with university students. Since we believe that Newham residents deserve an answer, we have posted below the questions which Newham Council refused to respond to when we posed them:
What is the current variable rate on the remainder of the portfolio?
When were the LOBOs first taken out?
How many are there?
What is the remaining debt repayment schedule on these LOBOs and how long are they set ot last?
How long did the negotiations with Barclays take? Who was involved? Was the Mayor involved in any of these negotiations?
Were cabinet members informed of these negotiations? If so when? What were they told?
Were there any costs involved in moving part of the portfolio to fixed rate?
Were the negotiations made under delegated authority or was it a cabinet or mayoral decision?
The council press release stated that there is “money on deposit, in case the bank decided to exercise its option to request a rise in the rate we pay”. How much money is that, exactly?
The press release also stated that: “They [LOBOs] were part of our balanced and award winning strategy which includes a balanced approach to risk.” What was the strategy? Who agreed it at the time? When was this strategy agreed?
Who were the financial advisers that gave advice on transferring the LOBOs?
The council does not see fit to answer these questions when posed by university students. But now they are in the public domain, perhaps a council representative will provide answers to the people of Newham.
We may be mere students but we adhere to the principle that the people should be told.