A Strong Credit Framework

A Strong Credit Framework

“A legal framework at the core of the local government accountability system effectively prevents local authorities becoming insolvent. Local authorities cannot borrow to finance revenue expenditure or run deficits.” National Audit Office, Financial Sustainability of Local Authorities. November 2014 Bonds issued by the UK Municipal Bonds Agency Plc are underpinned by a robust governance, risk and control (GRC) framework designed to minimise the risk of default. UK Municipal Bonds Agency Plc Bonds are subject to a Joint & Several Guarantee from participating borrowing local authorities. The agency will only lend money to UK local authorities Bonds issued by the UK Municipal Bonds Agency Plc are not explicitly guaranteed by the UK Government. However, UK local authorities have a resilient risk profile which is demonstrated by public investment grade ratings to date: no UK local authority has ever defaulted on a debt instrument. To ensure the robustness of the credit framework, the UK Municipal Bonds Agency Plc performs proprietary credits analytics in-house to protect against extreme credit events. All UK Municipal Bonds Agency Plc lending to local authorities is carried out on matched terms only for the principal, duration, interest rate and currency.

Joint and several guarantees – Core to a system of credit strengths

Guarantee Arrangements

At the core of the credit process is a ‘joint and several’ guarantee. The guarantee ensures that the councils are jointly responsible for the repayment of any debt liability securing greater protection for bondholders. The joint and several guarantee has been shown to increase peer oversight, thereby improving the overall creditworthiness of councils. A call within the joint and several guarantee is triggered if a council does not pay within a set time frame. A framework agreement exists between councils to insure against a default.

A strong legal system with robust financial controls

Local authorities (‘LAs’) in the UK are subject to powerful controls through legislative frameworks, robust financial controls and the Local Government Act 2003.

The Local Government Act 2003 is central to local authority credit quality:-

  • All borrowing is secured against the revenues (and not the assets) of an authority
  • All debts are ranked pari passu
  • Removes vires (“beyond the powers”) considerations of debt enforcement
  • Allows the High Court to appoint a receiver if debts are not paid
  • Creates the Prudential Code
  • Enforces the role of Section 151 officers as responsible for budgets and reserves

LAs are subject to a legislative framework (over 1,335 statutory responsibilities at June 2011) which limits their powers:-

  • LAs can only take an action if a specific power enables them to do so and it is reasonable to do so
  • Tax raising powers are not devolved
  • Government determines the majority of local authority funding

In addition to legislative controls, LAs are subject to robust financial controls.

  • Balanced revenue budgets must be set annually
  • Borrowing can only be for capital expenditure
  • The Prudential Code limits borrowing
  • The Minimum Revenue Provision (MRP) ensures that repayment of principal can be charged against council revenues
  • Financial reporting/ accounting interpretation is limited by the Local Government Act 2003
  • Section 151 Officers are officers “suitably qualified” officers appointed to manage local authority affairs and who have ensured conservative financial management of local authorities.
The role of Government

The UK Municipal Bonds Agency is an innovative initiative driven and funded by the local government sector. The UK central government does not explicitly guarantee the agency.