In your
consideration of the 'irrationality' argument (raised by an objector to
the accounts of the Council and the legality of the LOBO loans) I would
be obliged if you would consider these factors:
1.
As Cornwall Council has only a very short period to 'agree' a
replacement interest rate with a LOBO bank counterparty its only
practical option may be to repay the loan early. It now acknowledges
that it may need to hold £60m to £100m in short term deposits (which
currently pay almost no interest) against the possibility of that
eventuality. As borrowings are made to finance capital expenditure that
does not seem rational.
2.
I have never seen a schedule of all the call option dates to judge what
the exposure at any time is to LOBO bank calls. The schedule published
shows the next option date for each loan but not the totality of the
impact of option dates over the years concerned. So councillors have no
precise knowledge about whether the 'perfect storm' referred to in the
Council's Annual Treasury Management Strategy (Council minutes 21
February 2016) may be avoided and whether the 'float' of £60m to £100m
is sufficient.
3.
Fundamentally, the Council believes that it is not really exposed as a
result of the banks' options as, provided it holds enough money in short
term deposits, it can simply refinance elsewhere.
However,
it is likely that the banks would only exercise their option when
market rates rise above the rate payable on these loans.
The
real risk is that the banks would opt to revise the rate at a time when
market interest rates rose. Of course, the Council could then repay
early but when it refinanced elsewhere it would pay the new market rate
anyway.
Further, the
ability to periodically increase the interest rate by the banks is a
ratchet: It never comes back down even if market rates later drop.
So,
overall for a reduction in the introductory rate on the loans for a
short period of varying length, the Council agreed to borrow from the
banks on terms such that the interest rate can never reduce but can rise
without limit. And the Council compares this (favourably) with PWLB or
other fixed rates which cannot go down or up? It then locks itself into
this arrangement for up to 60 years?
It looks irrational to me. Even now councillors do not understand how astonishingly unwise these deals were.
Yours sincerely
Fiona Ferguson CC
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