Agenda item

The Director of Corporate Services presented the report.  The Authority currently held £2.0m of debt, incurring annual interest charges of £90k on this. As such the report considered options around early repayment.

The Director of Corporate Services advised that the Authority’s 2021/22 Treasury Management strategy outlined the following position in respect of existing debt.

“The Authority’s debt has arisen as a result of prior years' capital investment decisions. It has not taken any new borrowing out since 2007 as it has been utilising cash balances to pay off debt as it matures, or when deemed appropriate with the authority making early payment of debt. The anticipated holding of debt at 31 March 2021 is £2.0m. All the debt is from the Public Works Loans Board (PWLB) and is all at fixed rates of interest and is repayable on maturity. The table below shows the maturity profile and interest rate applicable on these: -

(Note, this debt was taken out in 2007 when the base rate was 5.75% and when the Authority was earning 5.84% return on its investments.)

Given the high interest rates payable on these loans, relative to current interest rates, we have again reviewed opportunities for debt repayment/restructuring. The level of penalty applicable on early repayment of loans now stands at £1.180m. (As previously reported the level of penalty is 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 get closer to maturity the level of penalty will reduce.)

Outstanding interest payable between now and maturity is £1.407m.

However as highlighted previously, any early repayment means that cash balances available for investment will be reduced and hence interest receivable will also be reduced. The extent of which is dependent upon future interest rates. It is estimated that if interest rate on investments are at 0.7% over the remaining period of the loan then repaying the loans now will be broadly neutral. 

It is also worth noting that the capital budget does allow for additional borrowing within the next 5 years. Current long-term borrowing rates are 1.67% for a 25-year loan and 1.49% for a 50-year loan, both of which exceed the breakeven position noted above. Hence given the penalties it is considered beneficial to retain these loans.”

A further update on this position had now been prepared in line with the resolution of the June Resources Committee.

Total debt remained at £2.0m, incurring £0.090m of interest payments each year. Outstanding interest payable between now and maturity totalled £1.363m. The penalty payable on early repayment now stood at £1.063m.  (It was noted that the penalty changed on a daily basis and therefore actual cost would not be known until a request had been made to PWLB.)

Any early repayment meant that cash balances available for investment would be reduced and hence interest receivable would also be reduced. The extent of this was dependent upon future interest rates, which were unknown hence the following possible scenarios had been calculated: -

·         If interest rate remained at the current historically low level of 0.10% throughout the next 15/16 years, which seemed very unlikely, and the investment was left in the call account, the lost interest receivable £0.047m would not outweigh the net saving from paying off the loan, and hence it would be financially beneficial to pay the loans off.

·         The current 5-year investment rate was approx. 1.00%, if the cash balance in this type of investment was maintained throughout the next 15/16 years, then the lost interest receivable £0.474m would outweigh the net saving from paying off the loan, and hence it would not be financially beneficial to pay the loans off.

·         Looking at potential 10-year and 15-year investment rates of 1.25% and 1.50% the lost interest was even higher and hence paying off the loan was even less attractive. (It was noted that these were estimated interest rates as a broker would be needed to offer these investments if there was interest in fixing longer term investments.)

The breakeven position occurred at an interest rate of 0.63%, whereby lost interest receivable netted off exactly against the net saving from paying the loan off early.

The position was further complicated by additional borrowing requirements shown in the current draft capital programme 2021/26. This showed new borrowing of £9m being required in 2025/26, hence if the loans were paid off now the amount of borrowing required in future years would simply be £2.0m more than currently forecast, £11m as opposed to £9m. The current rate for long-term borrowing was between 1.65% and 1.85%, which again were historically low levels. Even at the lower of these rates, the additional £2.0m of borrowing would incur additional interest charges of £0.396m over the next 15 years. These more than offset the gross saving of £0.300m identified earlier, which demonstrated that paying off the loans early and re-borrowing due to future capital plans would result in a net additional cost of £0.096m (ignoring any lost investment income), £0.144m if there was an allowance of £0.047m for lost investment income.

Summary

The following table summarised the position:

Ultimately any decision regarding early repayment of debt relied on future interest rates and future borrowing requirements. Future interest rates could not be known with any degree of certainty, hence there was always a risk that any decision would be incorrect. Paying off the debt early gave certainty; it enabled all the costs to be met in the current year and eliminated the interest payable budget (until such time as additional borrowing was taken out in future years), reducing the pressure on the revenue budget in future years. The Authority had sufficient cash balances to meet any repayments costs, but the penalty costs associated with this would be charged to the revenue budget, which would result in a significant in-year overspend.

However, the over-riding considerations in any decision had to be the net financial impact allowing for either lost interest receivable on investment opportunities and/or additional interest charges on new borrowing. Both of these meant that paying off the debt did not make financial sense, as any net saving was more than offset by either lost interest receivable and/or the additional interest payable on the new borrowing.

County Councillor Woollam noted that all the loans were at a fixed rate with the Public Works Loan Board.  He queried whether consideration had been given to other lending facilities.  In response, the Director of Corporate Services advised that the loans were taken out in 2007 and no further borrowing had been taken out since then.  He confirmed there were a range of options if there was a need for future borrowing and consideration would be given to the best options.  In terms of investments, the Treasury Management Strategy was approved in February each year and investment was made with other local authorities because of the Authority’s low risk appetite.

The Chairman advised that he had undertaken some comparison with other local authorities borrowing which had been taken out at a similar time and he was pleased to advise that the interest rates payable on the Authority’s borrowing was far lower. 

RESOLVED: - That the Committee agreed to leave the debt/investment portfolio as it currently stands and review further if the penalty on early repayment reduces significantly.