Municipal bonds offer councils more control over their debt and are a good way to raise money for local infrastructure.
February was an exciting month for the UK Municipal Bonds Agency (UKMBA), with the launch of our very first municipal bond issued for Lancashire County Council.
The deal has enabled Lancashire to borrow close to £350 million at a significantly lower rate than offered by the Public Works Loan Board (PWLB), and on terms that better suit its specific needs.
This first bond issue signals the dawn of a new era in local government finance – one in which, after an initial, confidential credit assessment, UK local authorities can quickly and easily access cheaper and more flexible funding through the UKMBA.
The aim of the UKMBA is to provide an alternative funding vehicle for UK local authorities, one that helps them save money. With 56 local authority shareholders and the LGA, the agency is owned by councils for councils.
It raises money in the bond market through the issuance of municipal bonds. These are issued by local authorities (the ‘issuer’) to raise money to pay for local capital programmes such as infrastructure projects, maintenance of roads, and the construction and upkeep of council properties by local authorities.
The local authority borrows money from an investor(s) for a defined period of time (the ‘term’) at a set interest rate, as you would do with a personal loan. It pays interest to the investor, typically every six months, for the duration of the term, until the investment that was borrowed has been paid off in full.
The UKMBA acts as the issuer on behalf of the local authority and lends the proceeds to the local authority through a standard loan agreement.
Unlike the PWLB, which can suddenly raise interest rates without warning – as was the case last October – the rates offered by municipal bonds are determined by the financial markets, so they are not susceptible to non-market (political) fluctuations. This means local authorities have more control over their debt and are protected from PWLB changes.
Many local authorities across the globe raise money in this way. In the United States, municipal bonds have, quite literally, built the nation since the launch of the first one in the 1800s.
Two out of three local infrastructure projects in the US are funded by municipal bonds, including highways, social housing, hospitals, schools, and airports. The building of San Francisco’s Golden Gate Bridge was financed by municipal bonds.
More recently, we have seen the arrival of green municipal bonds in countries such as France, funding projects with an ‘eco’ focus – including extending tramway lines, drawing up dedicated bicycle lanes, and constructing energy efficient homes.
The benefit of borrowing through the UKMBA is that we can work with local authorities to design the best funding structure for their specific needs and circumstances, whether that be a single bond issuance – as per Lancashire’s deal – or a pooled issue with several authorities, and short-term individual loans.
It’s quick and easy, and uses standard documents, so there is no need for expensive bespoke legal documents – and it’s cheaper than current PWLB rates.
