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Monday, 17 March 2014

Wolf Attacks On Local Authorities

It's a vicious coincidence that 'lobo' means wolf in Spanish and a 'Lender Option Borrower Option' in derivatives sales jargon (not to mention parallels with the infamous Timberwolf deal and even The Wolf of Wall Street).   

As explained to me by a researcher from MoveYourMoney in December, LOBOs were sold to UK local authorities to provide (very little) additional funding and to replace the authorities' long term, fixed rate loan contracts with terms that give the lender the option to increase interest rates every 5 years, while the borrower's only 'option' is to repay the loan. This introduces huge uncertainty over local authority funding costs that did not exist before.

How big a problem is this? 

Well, this post suggests that in 2009 at least 30 housing associations may have mistakenly replaced stable long term loans with high cost LOBO facilities in return for only small increases in net funding. But responses to recent Freedom of Information requests suggest that the problem goes further back in time. A response from Brent Council, for instance, shows that in the eight years to April 2010, the council agreed nearly £100m worth of LOBOs, with £21m of funding at risk of being 'called' this year, another £20m in 2015 and £35m in 2016.

Brent's last LOBO was agreed in 2010 and the lender has the option to raise rates in 2015. That was a deal for £10m at an interest rate of 6.75%, even though 'Liebor' rates were at rock bottom. The previous LOBO, agreed in 2008, had a rate of 3.95%. There's no telling what the lender might charge next year...

Now why would local authorities agree to LOBOs? Did they understand the value of the long term deals they were giving up

There should be yet another inquiry, but I suspect it will reveal the same old problems amongst the usual suspects that were highlighted by the Banking Standards Commission. Banks are only in the market to make money for themselves.


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