Lancashire County Council credit rating falls, but authority had already proved a popular investment

Lancashire County Council is amongst a number of local authorities to have had its credit rating downgraded.

Wednesday, 18th November 2020, 2:18 pm
Updated Wednesday, 18th November 2020, 2:23 pm

The ratings agency Moody’s made the move late last month to reflect concerns over the local government sector as a whole - citing a lack of clarity about central government’s intentions for councils.

Its concerns included the question mark over long-term funding for local authorities and outstanding national policy decisions on issues with significant local impact - including social care and devolution.

The agency also said that increased demand for council services set against a weak economic outlook was another factor in its decision.

Lancashire County Council headed to the bond markets earlier this year

County Hall’s baseline credit assessment has fallen one notch from A3 to Baa1.

However, the price of the authority’s bonds actually improved slightly in the wake of the announcement - because the market had been expecting a bigger downgrade of the UK government’s own sovereign bond rating, which also fell from Aa2 to Aa3.

The higher an organisation's credit rating, the less it usually pays in interest on its borrowing.

Lancashire County Council has issued two major bonds so far this year as part of a plan to refinance its capital funding requirements - a £350m bond over five-years and one for £250m over 40-years.

The Local Democracy Reporting Service (LDRS) understands that both of the bonds were around two and a half times oversubscribed - with the majority of investors coming from UK insurance companies and pension funds.

The new debt strategy was devised after a hike in interest rates last year by the Public Works Loans Board (PWLB), which has traditionally been a source of finance for local authorities.

According to the UK Municipal Bonds Agency (UKMBA), which issued the bonds on behalf of the county council, they will deliver “significant savings” for the authority - with the £250m product being secured at a rate 0.73 percent more favourable than the equivalent PWLB rate at the time of its issuance in August.

The authority was the first council to go to the bond market through the agency and the UKMBA’s own rating is based “solely on the unconditional and irrevocable guarantee provided by Lancashire”, Moody’s said in a statement.

The outlook for all five councils rated by Moody's shifted from negative to stable. Three of the group currently have better ratings than County Hall, which started out at Aa3 when it was first rated last year.

FINANCIAL PICTURE LARGELY UNCHANGED

Lancashire County Council will be able to “live within its means” in the current financial year, its chief executive has said.

Angie Ridgwell updated cabinet members on the monetary outlook for the authority, telling them that County Hall was “more fortunate than other councils that find themselves in more straightened circumstances”.

However, the county council is still forecasting a funding gap of £78.8m by 2023/24, a slight reduction from the £79.3m predicted in September.

The authority’s reserves currently stand at £151m and are expected to be sufficient to plug any holes in the budget until part-way through 2023/24 - but the council is planning to identify further savings in order to achieve a sustainable financial position by that point.

The impact of Covid-19 means that only just over half of its intended savings for the current financial year - totalling £52.1m - are on-track to be delivered by the end of March 2021.

Ms. Ridgwell also warned of the “considerable uncertainty within the forecast[s]” - not least because the government’s planned spending review is now set to cover just 12 months, rather than three years, as originally expected.

The annual local government financial settlement is due next month.