Lender option borrower option

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Lender option borrower option or lender's option borrower's option (LOBO) is a long term borrowing instrument available in the United Kingdom. They involve periodic interest re-fixings, which incorporates two linked options: [1]

Contents

They are provided by banks and the loan contract runs for between 40 and 70 years. [1] There is no regulatory body responsible for overseeing their use. [2]

Origins

Public bodies are able to borrow money through government Public Works Loan Board (PWLB) loans, however borrowing from banks in the form of LOBOs were prevalent from the early 2000s. A certain amount of borrowing from banks had been permitted since the late 1970s. At this time, it was often the case (although certainly not always) that a loan might involve a borrower's or a lender's option (BO or LO), with the embedding of these dependent on prevailing interest rates and the council's own needs at the time. Such BOs or LOs might offer early repayment, or changes in the margin or rate-fixing frequency. LOBOs existed at this time too, and (as would be expected) offered the borrower a chance to repay at no penalty if the lender's choice of new terms was unacceptable; rarer were rather more flexible sequences like BOLOs or BOLOBOs. These all rather faded from use in the late 1980s - early 1990s, and were replaced by "straight" fixed-rate term loans. Modern, more complicated LOBOs (that is, those from c. 2000) were made available with low teaser rates, cheaper than PWLB loans so they appeared to be an attractive alternative. [1] Few councils had access to the complex option valuation models required, nor the market data needed as inputs for such models. [3]

Criticism

LOBOs have provoked criticism because of high initial profits to the lender from day one and high subsequent interest rates. Clive Betts, MP and chairman of the Communities and Local Government Committee, has called for an inquiry into ‘outrageous’ LOBO loans. [4] Defences to these criticisms have been offered by some of the borrowers. [5]

Local councils

Banks, including Barclays and Royal Bank of Scotland (RBS), provide LOBO loans to about 240 UK councils (63% of all councils in 2013 [6] ) with a total value of £15 billion. Out of this £15 billion it is estimated that about £1 billion in upfront profits was made by the lenders. [7] [ better source needed ] LOBOs are currently[ when? ] almost a fifth of all council borrowing.[ citation needed ]

LOBOs were recommended to councils by paid specialist financial advisers some of whom may have also been paid commission by the banks providing the LOBOs. [1]

At least 12 councils have the most expensive types of LOBO loan. Most of these have "inverse floaters" taken out with RBS - interest rates for the loan are increased if general bank lending rates decrease. [7]

As a direct consequence of making repayments on LOBOs, councils have had to make major cuts in services to their residents. [1] [2] It has been calculated that if councils were free to relinquish their LOBO contracts at no penalty and instead borrow at a more typical market rate it would save them about £145 million for 2015 alone. [1] Some councils are considering taking legal action. [8]

Some residents of councils with large LOBO loan books have requested that auditors take their council to court under provisions in the Audit Commission Act. Newham resident and Green Party spokesperson Rachel Collinson was the first to do so, asking then auditor of Newham Council, PwC, to declare the spending on LOBO loans to be ultra vires , or technically illegal, being beyond the council's authorised powers. This is because LOBOs are packaged derivatives, complex financial products that councils are not permitted to purchase. The precedent for this was set in the court case against Hammersmith and Fulham in 1992. [9] Newham, however say LOBOS have saved them £65 m between 2002 and 2015, and their interest payments were halved. [1]

Examples

Housing associations

Up to 30 housing associations have bought up to a total of £1.25 billion of LOBOs. [18]

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References

  1. 1 2 3 4 5 6 7 8 How Councils Blow Your Millions: Channel 4 UK Dispatches transmitted 6 July 2015 - News release
  2. 1 2 3 Joel Benjamin (October 2014). "Newham Council and the LOBO loan scandal". Contributoria . Archived from the original on 29 July 2015.
  3. ↑ Colin Marrs 2 July 2015 Room 151 - Local Government Treasury, Technical & Strategic Finance LOBO documentary puts councils in firing line
  4. ↑ Laura Sharman 7 July 2015 LocalGov Betts calls for inquiry into ‘outrageous’ LOBO loans
  5. ↑ Colin Marrs 9 July 2015 Room 151 - Local Government Treasury, Technical & Strategic Finance Finance chiefs defend their record on LOBOs
  6. ↑ David Green 27 June 2013 Room 151 - Local Government Treasury, Technical & Strategic Finance Treasury stats show councils are poles apart
  7. 1 2 Danny Walker 6 July 2015 Daily Mirror How Councils Blow Your Millions: Documentary ready to lift the lid on where public money goes
  8. ↑ Pete Apps 21 July 2015 Inside Housing Councils mull legal action on LOBO deals Archived 2015-07-22 at the Wayback Machine
  9. ↑ "Sent loco by Lobos? The great council loan controversy". The Independent. 10 March 2016. Retrieved 7 February 2017.
  10. ↑ 8 July 2015 Cornish Guardian Cornwall taxpayers hit with £400m toxic loans Archived 2015-07-11 at the Wayback Machine
  11. ↑ 27 August 2015 Express & Star Revealed: Wolverhampton council loans to cost £270 million
  12. ↑ 8 July 2015 Express & Star Revealed: High rates on £115m in old loans to Walsall Council
  13. ↑ Sam Blackledge 14 July 2015 Plymouth Herald Plymouth council paying interest on £100million in 'LOBO' loans Archived 2015-07-16 at the Wayback Machine
  14. ↑ 24 July 2015 Cambridge News Cambridgeshire County Council’s £45m annual interest bill Archived 2015-07-24 at the Wayback Machine
  15. ↑ Liam Thorp 15 July 2015 The Bolton News Bolton Council has nine controversial 'LOBO' bank loans worth £79 million
  16. ↑ Tom Edwards 6 July 2015 Malvern Gazette Special report: £70m in County Hall loans linked to national TV investigation over 'risky' bank lending
  17. ↑ Victoria Prest, 14 July 2015 The Press City defends long-term loans, amid national controversy
  18. ↑ Michael Bow 29 April 2016 Evening Standard ‘Lobo’ casualty list lengthens as new victims surface

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