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Newham Council’s controversial loans under scrutiny

09:28 17 March 2016

Lobo loans taken out by Newham Council are being examined by financial services firm PwC

Lobo loans taken out by Newham Council are being examined by financial services firm PwC

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Independent auditors have been asked to establish if high-interest bank loans, taken out by Newham Council between 2002 and 2009, are “unlawful”.

Independent auditors have been asked to establish if high-interest bank loans, taken out by Newham Council between 2002 and 2009, are “unlawful”.

A campaigner has claimed the council’s lobos (Lender Option Borrower Option) totalling nearly 90 per cent of its debt portfolio, the largest in the country, have left the council “in a precarious financial position”.

A complex type of lobo known as a inverse floater “which is designed to reduce the interest payments if rates go up” as reported by Channel 4’s Dispatches programme last July is also under scrutiny. Newham Council currently has six.

Rachel Collinson, the Green Party London Assembly candidate for city and east, has written to auditors PwC asking them to question the validity of the loans with the courts, in addition to questions already raised by Cllr John Whitworth, Cllr John Gray and Cllr Rokhsana Fiaz.

The financial services company has been asked to determine whether the loans are “unlawful” under the Audit Commission Act.

In her letter to PwC, Ms Collinson said: “I believe that making such a large borrowing commitment under the conditions which the banks imposed, without benchmarking and recording the decisions against comparable PWLB loans, or seeking external financial advice, amounted to ‘irrational’ conduct.”

Lobo loans are long-term bank loans with interest rates that can be re-fixed by the bank. They were taken out by numerous councils as a prudent option in the early Noughties, a period when interest rates were volatile.

Ms Collinson told The Recorder: “Over five years the bank can choose to change the interest of the loan or have it paid back. The problem is that Newham Council does not have the money to pay back the loans.

“If there is another financial crash they would have to be paid back immediately – it has left the council in a precarious financial position.”

However, Newham Council said the loans has saved it £64m since 2002 because the average interest rate of lobos was 4.6pc compared to 10pc on loans previously paid under the government-run Public Loan Works Board (PWLB).

A spokeswoman said the council has 27 lobo loans totalling £564m and refinanced £179m of its £627m debt between 2002 and 2009.

She said: “The 2003/04 restructuring exercise generated annual savings of £3.7m (£40.7m to 2014/15), the 2007/08 restructuring generated annual savings of £3.2m (£22.4m to 2014/15).

“Other savings have also been made in debt management expenses and also, where by dealing direct with the banks, the council did not incur brokerage fees, which by the way, are payable when raising PWLB debt.

“The impact of lobo debt has resulted in a significant reduction in average rates of debt. In 2002/3 the average weighted rate of interest on PWLB debt was 7.7pc compared to the average rate of debt the council now has of 5.68pc at March 31, 2015.

Financial analyst Nick Dunbar has previously estimated that Newham Council would have to pay £1.2 billion as of the end of 2015 and not £564m as the council estimates, if it chose to repay the loans early.

He said: “£10m is the cumulative amount since 2002 that Newham has paid above the PWLB rate, had it taken out the same amount of PWLB loans instead of lobos. Last year Newham paid ££7m above the PWLB rate.”

Ms Collinson added: “It is not the number of loans, it is the volume. It is a big interest rate now.”

She said that if Newham Council were to acknowledge “the mistake they have made” they would be able to “take the banks to court for misselling a derivative (complex financial instrument) disguised as a loan”.

A council spokeswoman added: “The objection relates to the council’s decision to take out lobos between 2002-2009 and this matter is with the council’s external auditors for their consideration under their statutory process.”

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