There’s no sunshine on the horizon for Northamptonshire County Council. Having taken out £150m worth of Lender Option Borrower Option loans, or LOBOs – used to finance infrastructure and schools – the council now finds itself desperately strapped for cash and has been forced to ban all new spending as it tries to repay its “toxic” debt, with a £21m deficit for the financial year 2017/2018.
Northamptonshire County faces an average interest rate of 4.60% across its 19 LOBO loans, compared to an average interest rate of only 4.25% across all loans for the council. LOBO borrowings were commonplace between 2003 and 2011, since they offered UK councils a deceptively low intial interest rate compared to Public Works Loan Board (PWLB) loans. However, these LOBOs are completely unregulated borrowings, typically lasting for a 40 to 70 year period. According to Northamptonshire County Council, breaking these contracts today would cost a staggering £256m!
Abhishek Sachdev, Vedanta’s CEO, has spoken at length about the dangers of LOBO loans, which – crucially – were (or should reasonably have been) known before councils across the UK locked themselves into such long-term contracts. Abhishek told the BBC that “ there is a reason why none of our large PLC corporate clients would ever enter into such a loan”. For more information, please see the Channel 4 documentary here and Abhishek’s more recent BBC News & Radio interview here.
The BBC also exposed this issue in another website article which can be seen here.
Vedanta estimates that there are currently 1,000 LOBO loans across the country, with a combined face value (total borrowing amount) of £15bn and an exit cost of £26bn!