Newham to save up to £94 million on its debt portfolio

16 February 2017 in Council and democracy and Finance
Newham Council could save up to £94 million in future after the council’s Cabinet today (Thursday 16 February) agreed to restructure its market debt with a major high street bank.
​The decision enables the council’s director of financial sustainability to strike a new deal with the bank that will switch their structured loans (otherwise known as Lender Option Borrower Option or LOBO loans) into normal fixed rate loans.

The deal also takes the ability away from the bank to change the interest rate levels at regular intervals over the remaining lifetime of the loans.  The new financial agreement will save the council up to £1.6 million per year on interest payments on these long term loans.

This new deal will improve the council’s credit position thereby reducing the cost of future borrowing. Moreover, it will further stabilise the council’s future debt costs helping to safeguard council tax from future increases and protecting council services. 

The agreement was made following lengthy negotiations with the bank. The market conditions are now right to strike this this deal which will deliver a clear financial benefit to the council.

The new deal is line with the council’s Treasury Management Strategy, which reviews how much the council can afford to borrow and constantly monitors opportunities for restructuring or refinancing existing council debt where there is a clear benefit in doing so. 

The council borrows money to carry out works such as improving the borough’s roads and to fund long term assets like buildings, such as schools or bringing homes up to a decent standard. Government regulations meant that we cannot use long term loans to run services.

In 2007, Newham Council refinanced some of its debts to take advantage of lower interest rates available, at that time, through a series of long term loans from banks. 

Previously the council was paying in excess of 10 per cent on its loans with the Public Works Loans Board, which lends government money to councils.  These loans helped to refinance this expensive debt saving the council nearly £11 million to date in interest payments.  

Councillor Lester Hudson, cabinet member for finance, oneSource and commercial opportunities, said: “We took out these types of LOBOs as they represented the best deal for the council at the time and have saved us millions of pounds in interest payments. They were part of our balanced and award winning strategy which includes a balanced approach to risk.

“As a council, and in line with good stewardship, we are always working to reduce the cost of our borrowing. We have taken independent legal and financial advice on this agreement and it is now the right time for us to restructure these loans.”