Agenda item

Glyn Daykin, Finance Analyst presented the Treasury Management Strategy for 2015/16, highlighting the following points, and addressing questions posed by Councillors:

(a)  the latest inflation figures have dampened down expectations of the base rate being increased anytime soon.  Changes in UK legislation mean an increased risk of Council taking losses on its investment;

(b)  minimum credit rating has been reduced to BBB+.  This change allows for some flexibility, although the overall risk hasn’t changed; 75% of close clients have reduced minimum risk criteria for this reason.  Less, more secure investments are sought overall;

(c)  net borrowing cost has reduced, with overall treasury risk also being reduced.  Nottingham City Council expects to borrow up to £15million, although there could be some requirements for additional borrowing.  Nottingham City Council is considering taking a forward starting loan, a product that fixes a loan rate now and allows cash to be taken at a later date (details are contained within Appendix 9 of the agenda pack).  LA’s are starting to look at these types of loans, but they are not common in the public sector.  This would hedge against rates going up, especially if you have large schemes that need funding;

(d)  if we took lots of new loans now to obtain money whilst rates are lower, this money would have to be invested; there is a higher risk on deposits at this moment.  In addition to this, interest would have to be paid on this money up until the point where the money was needed for a project.

  Projects such as NET are ideal for a Forward Starting Loan, as they have fairly certain expenditure.  The risk of rates going up in the future is reduced by using such a loan;

(e)  due to the current state of the economy, there is a risk in holding onto money.  Banks cannot be trusted as they once were, due to a lack of Government support.  If a bank gets into trouble, new legislation says that it cannot be bailed out.  As an example, if a bank made 5% losses, the loss to the council could be 25-30%;

(f)  Forward Starting Loans are a new product for LA’s, but have been used regularly outside of this area.  The only risk encountered so far was in the initial stages, when Legal had to investigate whether it was possible for LA’s to use this product;

(g)  Bond agency is a potential source of taking new debt, although it is still being established, and is not an option available to the council now.  Some of the bigger authorities have looked at creating their own bond and putting it into the market.  This carries a significant cost, and requires a lot of work on credit rating.  Nevertheless, it can be considered as an option in the future;

(h)  a business case and feasibility studies are required as standard protocol for any major new schemes or investments.  This catches all big ideas coming through the council.  The cumulative risk to the authority for all schemes is kept under review by the Acting Chief Finance Officer;

RESOLVED to:

(1)  ask Glyn Daykin to write a memo to Councillors of this committee to assess the risks/benefits involved with Forward Starting Loans;

(2)  bring a report on all capital schemes and values to the next meeting, so that Councillors can pick schemes that they would like to look at in more detail.  This can be provided by a Capital Accountant;