Almost a year ago on 20 July 2015, Jo Cox MP and the Communities and Local Government Select Committee (CLG) heard evidence from Abhishek Sachdev of Vedanta Hedging, and others, about the mis-selling of LOBO loans to Local Councils. LOBOs are complex loans containing derivatives.
Jo Cox MP asked 4 out of the 61 questions, and they were the most relevant and insightful questions asked during the whole session.
The specific questions asked by Jo Cox MP to Abhishek Sachdev are below and can be watched from 16:20 below:
Q12 Jo Cox: Mr Sachdev, in the programme, you cited a Newham Council LOBO for £25 million with a £15 million exit penalty fee. Do local authorities have to pay that kind of fee if they are exercising their option to leave the LOBO, or do they only pay it if they choose to break out of the deal early?
Abhishek Sachdev: It actually depends on how each individual contract is structured. Typically speaking, if the bank is exercising their right to say, “We want to increase the rates”, and you as a council have either got the option to pay that extra rate or just repay the whole loan, then that breakage cost is not payable. If they want to exit the loan at any other point or if they want to refinance it, for example, change any of the terms, change bank or anything like that, then yes, that full breakage fee would be payable.
Q13 Jo Cox: Would councils have to pay a similar exit fee if they wanted to get out early from a PWLB loan?
Abhishek Sachdev: The fees typically for a PWLB loan would be much lower.
Q14 Jo Cox: Do you know what they would be roughly?
Abhishek Sachdev: We did some analysis based upon some of the outstanding PWLB loans last year, and we looked at the total redemption costs for the PWLB loans as a proportion of what we call the face value of these loans, and it was about 38%. Doing the same thing for the current LOBO portfolio is above 90%.
Jo Cox: Sorry, could you go over that again?
Abhishek Sachdev: The relative cost of cancelling LOBO loans is much, much higher, from the data that we have analysed, than corresponding PWLB loans. The reason for that is generally twofold. One is that the LOBO loans tend to be far longer in duration. When we looked at the data, the average PWLB loan was about 22 years in duration, whereas the LOBO loans can be 60 or 70 years, for example, and because of the way these things are structured, the longer the derivative, the greater the potential cost. Similarly, like I was saying earlier, these LOBO loans have got these embedded complex interest rate call options. If the council wants to get out of these LOBO loans, they basically have to go to the bank and repurchase these call options that they sold. Whether they knew they sold them or not is a separate issue. They have to repurchase them and that adds to the cost as well.
Q15 Jo Cox: Could you just clarify the differential with the exit fee? You mentioned 38% and 90%.
Abhishek Sachdev: From the data we looked at, which was last year’s data, looking at all of the redemption costs from the PWLB loans, we worked out that the redemption cost as a proportion of the principal loan amounts was 38%. Doing a similar exercise looking at the LOBO penalties and the redemption costs versus the amount of the LOBO loans, it was above 90%.
The video can be watched here from 16:20 onwards