What is the current situation?
Herefordshire Council has 2 LOBO loans totalling £12 million, including loans that have had their option removed by the bank.Herefordshire Council is 165th out of 210 in the ranking of councils with the most LOBO debt.
Since we began monitoring in 2015, this is what happened.
| LOBO loans in 2015 | £12 million |
|---|---|
| Term ended | 0 |
| Exited | 0 |
| Option removed | 0 |
| Remaining total | £12 million |
How big is the problem?
Herefordshire is currently paying £540 thousand in interest per year.
For a sense of scale, this corresponds to 0.4% of what the Council collected in council tax for the year 2020/21.
It is projected to spend at least £16.47 million in interest payments over the remaining term of the loans, the last one ending in 22/11/2054.
The interest rates for Herefordshire Council’s LOBO loans are between 4.500% and 4.500%. Currently, councils can borrow from central government (via the Public Works Loans Board) at much lower rates (between 1% and 2.5%) and on much more favourable terms. To illustrate, on a loan of £10m over a 50 year term, at 4% a council will pay £20m in interest while at 2% they will pay £10m.
Banks can sell their loans to other lenders. The selling price of a loan varies constantly based on the embedded derivatives and on the likelihood of the loan and interest being paid in full. We’ve rated the loans based on their most recent market valuation, also called fair value. A loan with a high rating will be considered valuable by the lenders and therefore might have a higher exit penalty compared to a loan with a lower rating. However, if the Council were able to negotiate a good exit deal, it could potentially save more on a high-rated loan than on a lower-rated one.
Below is an outline of Herefordshire Council’s LOBO loans at the end of the 2020/21 financial year.
A few notes on the data:
- Annual interest is a result of an approximate calculation (interest rate*principal), not the exact amount paid by the Council which might vary slightly per year
- Remaining interest indicates the total interest owed until the term of the loan ends. This is also an approximate calculation (annual interest*remaining term) and must be considered as a minimum as it does not take into account the case in which the bank uses its option to raise the interest rate.
- Rating is determined by the formula [fair value/(principal+remaining interest)]. High corresponds to results above 0.7, low to results below 0.6 and average between 0.6 and 0.7. Please note that the fair value of a loan is related to a specific moment in time and changes constantly. The rating here is based on the most recent fair value provided to us, which is usually calculated at the end of the last financial year.
Current loans
| Bank | Principal | Status | Remaining term | Current interest rate | Annual interest | Remaining interest | Rating |
|---|---|---|---|---|---|---|---|
| Danske Bank | £6,000,000 | Active | 31 years | 4.500% | £270,000 | £8,370,000 | Average |
| Dexia | £6,000,000 | Active | 30 years | 4.500% | £270,000 | £8,100,000 | Average |
| Totals: |
What can I do about it?
Some Banks are allowing council’s to exit their LOBO loans early with a reduced penalty fee. If your council holds LOBO loans with these banks, we have listed them below.
For each bank, we provide a list of the loans exited, and when known the exit fee paid. You can see how much a council saved exiting a loan by comparing the penalty fee with the remaining interest at the time of exit. The rating will show how valuable the loan was considered at the end of the financial year before the exit.
For each bank, whether loans have been exited or not, we have listed the other councils that hold or held loans with them. You might want to consider collaborating with councils that still have loans with the same banks to negotiate good exit deals. We also suggest you get in touch with councils that have already exited their loans to learn from their experience.
If you decide to take action, we recommend you bring up the issue within the council and provide the Finance Director with the data on this site, including the downloadable spreadsheet, and the information in the knowledge base. If you struggle to find support within your council, consider seeking independent financial advice. Alternatively, get in touch with us for further guidance.
Danske Bank
Danske Bank has allowed 0 councils to exit 0 LOBO loans totalling 0 and has removed the option from 0 LOBO loans totalling 0.
It has 24 outstanding loans with 22 councils totalling £176 million.
Councils that still have loans with Danske Bank include:
Ashfield, Brent, Brighton & Hove, Colchester, Ealing, Edinburgh, Glasgow, Havering, Herefordshire, Hillingdon, Kirklees, Leeds, Leicestershire, Merton, Neath & Port Talbot, Nottingham, Oldham, Oxfordshire, Plymouth, Walsall, Woking, WolverhamptonDexia
Dexia has allowed 0 councils to exit 0 LOBO loans totalling 0 and has removed the option from 0 LOBO loans totalling 0.
It has 312 outstanding loans with 110 councils totalling £2.95 billion.
Councils that still have loans with Dexia include:
Aberdeen, Aberdeenshire, Ashfield, Barking & Dagenham, Bassetlaw, Birmingham, Blackburn with Darwen, Bolton, Bradford, Brent, Brighton & Hove, Bristol, Buckinghamshire, Bury, Cambridgeshire, Camden, Cardiff, Cheshire East, Clackmannanshire, Colchester, Cornwall, Coventry, Croydon, Darlington, Derbyshire, Doncaster, Dundee, Durham, Ealing, East Lothian, Edinburgh, Falkirk, Fife, Gateshead, Glasgow, Gloucestershire, Great Yarmouth, Greenwich, Haringey, Harrow, Hartlepool, Herefordshire, Hertfordshire, Highland, Hillingdon, Hounslow, Kent, Kingston upon Thames, Kirklees, Leeds, Leicester, Leicestershire, Lewisham, Liverpool, Luton, Manchester, Medway Towns, Mid Suffolk, Midlothian, Neath & Port Talbot, Newcastle upon Tyne, Newham, Newport, Norfolk, North Ayrshire, North East Lincolnshire, North Yorkshire, Northamptonshire, Northumberland, Nottingham, Nottinghamshire, Oldham, Oxfordshire, Perthshire & Kinross, Peterborough, Plymouth, Redbridge, Redcar & Cleveland, Rochdale, Rotherham, Salford, Sandwell, Scottish Borders, Sheffield, Shropshire, Slough, Solihull, Somerset, St Helens, Staffordshire, Stoke-on-Trent, Suffolk, Sunderland, Sutton, Swansea, Tameside, Telford & Wrekin, Thanet, Torbay, Trafford, Walsall, Warrington, West Lothian, Westminster, Wiltshire, Windsor & Maidenhead, Woking, Wolverhampton, York, Stockton-on-Tees