Grant Thornton reserves judgment on LOBO loan
Lancashire County Council has delayed signing off its accounts after auditor Grant Thornton expressed doubts over the accounting treatment of a long-term loan (LOBO)
9 Aug 2018
In a report to the council committee, Grant Thornton expressed concern over the treatment of a £52.2m Lender Option, Borrower Option (LOBO) loan that the council had obtained in 2010. In the report Grant Thornton said: 'The Council’s loan is a specific complex variant, being [an] inverse floating rate LOBO loan' and noted that 'loans of this type have been subject to significant public scrutiny in recent years'.
In the auditor's view, 'at the date of this report the Council has provided further information regarding this matter which dates back to 2010. This has been very useful in determining the nature of the contract and therefore the accounting treatment. Whilst we have not reached a definitive view on this matter as at 20 July we aim to ahead of the Audit and Governance Committee meeting on 30 July 2018'. The deadline has since been extended by two weeks.
An inverse floating rate LOBO has specific conditions under which the interest rate payable increases as the 10-year interest rate falls. They were sold on the basis that if the London Inter-bank Offered Rate (LIBOR) rate rose, it would have provided a hedge for the council. Instead, the rate fell, significantly raising interest rates.
The complexity of the loan has led to 'differing views' on the material value of the council's finances which could lead to a restatement. The council is currently being forced to rely on £47m from its reserves to set a balanced budget in 2018-19, a practice Grant Thornton warns against: ‘The Council’s financial position is at a tipping point and continuing reliance on reserves is seen as unsustainable. The need for a more transformational and rigorous savings programme needs to be delivered during 2018-19 and beyond’. In addition to £50m in private loans, Lancashire County Council also owns £338m in loans to the Public Works Loan Board (PWLB), a body that provides local authorities with funds from the Treasury.
LOBO loans were first permitted for local authorities in the early 2000s when the rules governing private sector loans to councils were relaxed. Their terms are often 50 to 70 years and place considerable pressure during times of budget cuts.
According to data from debtresistance.uk, 240 councils across the UK have LOBOs worth a total of £15bn. The biggest is Newham London Borough Council with £577m at an interest rate of 7.6%. Interest rates on LOBO loans can be up to 11% after the initial teaser rate expires.
Two years ago, three former Barclays employees were convicted of manipulating LIBOR and the bank was fined £59.5m by the Financial Services Authority for its role in the scandal. In July of this year, 14 local authorities decided to take Barclays bank to court, taking the position that the issuing of LOBO loans was fraudulent because they were pegged to LIBOR.
Report by James Bunney