Camden Council, like the British Government, is heavily indebted. It has a debt stock of £343m, incurring £17m in interest payments each year. And that’s just interest, not repayment of the principal capital.
For those quick with numbers, £17m interest on £343m of debt is a 5% interest rate. This is terribly expensive: more than anyone would pay on their mortgage and far more than any public body should face.
That’s because we’ve been locked into very long-term debt at horrendously high interest rates. This includes six commercial Lender Option, Borrower Option loans – or LOBOs for short. The average interest rate on these is over 4.6%. This is compared to 0.6% interest that Camden receives on its financial assets.
Officers replied that refinancing costs would decline as we get closer to debt maturity. Well, obviously. But at 4.6%, this debt is horrendously expensive now.
I understand financial institutions’ commercial attraction to keeping this debt going. But I also understand that other local councils are looking to refinance theirs to reduce their crippling interest bills.
This should include paying off some principal capital – the principal capital in LOBO debt is payable in a lump sum upon maturity. It’s like an interest-only mortgage. And like interest-only mortgages, only people without any other options should ever go for them.
A reduction of our interest bill by 10% would see Camden save £1.7m a year. A reduction of our interest bill from it’s average rate to the rate that Camden pays on its new debt would save a whopping £10m.
A refinancing could be supported by use of some of Camden’s large stock of cash and short-term financial instruments. The Council holds £334m: almost exactly as much as it owes in debt. Except it earns 0.62% on its financial assets, compared to the 4.63% it pays on its LOBO debt.
Why do we hold so many assets when we’re net in debt? Well, some is essential to support payroll and other ongoing expenses, some is ringfenced for Section 106 and CIL, and lots and lots is to mitigate against risk. Much of that risk is because of the council’s Community Investment Programme (CIP): meaning the cost of holding these assets is a huge hidden cost of the programme.
Camden needs to examine whether it holds too many financial assets – judging by my experience of private businesses’ requirements, I think it does – and use excess assets to refinance its long-term debts.
Obviously, you can’t just magic that, but you can push for it. Given the sums involved, managing Camden’s debt stock more effectively should be one of the council’s top priorities. It could save millions, which could be ploughed into front-line services and lower taxes.