Kent County Council refinanced LOBO loans worth £60m at around 4.2% interest, mostly with a loan from the government’s Public Works Loan Board (PWLB) at 2.21% interest. Northamptonshire County Council did the same for a £20 million LOBO loan.
LOBOs are expensive long-term loans we consider illegitimate for reasons outlined in chapter 5 in our recent report on the citizen debt audit in the London borough of Newham.
Following the announcement of loan refinancing savings, we conducted an analysis into savings that could be obtained by other councils that have taken out LOBO loans. Taking the average interest rates and years to maturity from each council’s loan portfolio and using 2.21% as the PWLB rate, we calculated potential savings by multiplying the annual difference between LOBO loan & PWLB loan rates, and multiplying savings by the years to loan maturity.
We found that for just the top 10 borrowers of these risky and expensive bank loans, they could save £4bn over 40 years by refinancing via the PWLB. For the 240 councils that have taken out LOBO loans, savings could reach £16bn over the lifetime of the loans. These substantial savings could relieve pressure on strained austerity budgets, free up cash for local services and prevent further unnecessary cuts.
It is important to note that the PWLB rates vary according to council, region and political control, and are subject to daily change, so the calculations should be taken as indicative only. Our figures do not include possible breakage fees, as we believe there should be no extra cost for councils to exit illegitimate LOBO loans, which were systematically mis-sold. For Kent County Council, 23% of the face value of the refinanced LOBO loans was paid to RBS as breakage fees. For the table below, see full workings and methodology here.
Refinancing Savings For Top 10 LOBO Loan Debt Councils
Shadow Chancellor calls for investigation into LOBO loans
Shadow Chancellor John McDonnell told to the Guardian in relation to findings that Councils were over-paying by as much as £16bn: “The government has a role to play now in ensuring there is a full, independent and open investigation into the use of these financial instruments and action taken to restore any historic loss to the public purse.”
Demonstrating the extent of cross-party concern regarding toxic LOBO loans, Abhishek Sachdev, a Hertsmere Cllr (Conservative), scrutiny chairman and financial expert said in a recent BBC interview:
“All taxpayers and residents across the country should care about this [LOBO loan] issue, because talking from my experience as a councillor in my borough, the kind of efficiency gains that can be achieved by sharing services or cutting down on benefit fraud and that type of thing doesn’t come anywhere near what councils could save by cutting down on these very high rates of interest paid on LOBO loans.”
We now await an official response from Government to McDonnell’s call for a full, independent and open investigation, and will post further updates as they are received.