Agenda item

The Director of Corporate Services advised that a report was submitted to the Resources Committee on 27 September which provided information on the impact of repaying loans. As a result the Committee agreed to pay off all loans that matured in the next 10 years. Subsequently on 5 October loans of £3.184m were repaid which incurred a penalty charge of £0.636m. Therefore the outstanding PWLB balance was reduced to £2.330m. Of this £0.330m was due to mature in December 2017 and was not repaid as PWLB did not normally accept repayments for loans with less than one year to maturity. Therefore the estimated balance at the end of the financial year was £2m with a maturity profile and interest rate applicable of:-

Following the change in base rate to 0.5% in November the Resources Committee requested that a revised position should be presented to this Authority meeting.

The level of penalty applicable on early repayment of loans had been reviewed again and now stood at £877k compared with the penalty applicable in September of £971k. (As previously reported the level of penalty was dependent upon two factors, the difference between the interest chargeable on the loan and current interest rates, the greater this difference the greater the penalty, and the length to maturity, the greater the remaining time of the loan the greater the penalty. Hence, as interest rates increase or as loans got closer to maturity the level of penalty would reduce.) This compared with the outstanding interest payable between now and maturity of £1.684k. This gave a gross saving of £807k.  However, any early repayment meant that cash balances available for investment would be reduced and hence interest receivable would also be reduced.  The extent of which was dependent upon future interest rates.

Comparisons utilising i) the updated base rate of 0.5%; ii) current gilt rates; and iii) demonstrating a breakeven position were considered as set out in the report.  If returns on investments over the next 20 years exceeded 1.49% it was financially disadvantageous to pay off the loans, if interest rate averages less than 1.49% it was financially advantageous.  It was noted that other than during the current financial crisis interest rates had never been as such a low rate.  If, as seemed likely, interest rates proved to be higher than this then the early repayment of debt resulted in a worse overall financial position.

The Director of Corporate Services advised that the current PWLB loan rates were 1.77% for a 5-year loan; 2.25% for a 10-year loan and 2.74% for a 20?year loan, all higher than the breakeven position.

Ultimately any decision regarding early repayment of debt relied on future interest rates which could not be known with any degree of certainty, hence there was always a risk that any decision would be incorrect.  Paying off debt early gave certainty, it enabled all costs to be met in the current year and eliminated the interest payable budget in future years, reducing the pressure on the revenue budget.  The Authority had sufficient cash balances to meet any repayment costs, still having £365k of an earmarked reserve to offset a proportion of any penalty costs associated with this, with any balance being met from either the revenue budget or from a drawdown against the general reserve.  The draft capital budget did not show any additional borrowing being required in the next 5 years however, any major additional item of capital expenditure could impact on that position.

Members discussed whether to repay the remaining 3 loans, whether it would be feasible to consolidate the 3 loans into 1 at a lower rate and whether it would be beneficial to reconsider after a decision had been taken on the future relocation of Service headquarters in order to minimise the need to take out future borrowing.

RESOLVED: - The Authority agreed not to repay the remaining 3 loans at this time.