Monitoring Risk in Local Government Finance David Blake dblake@arlingclose.com

Financial Strength Ratings

Arlingclose provides Financial Strength Ratings (FSRs) for local authorities in five categories: debt, interest cost, income flexibility, reserves, and budgetary control; plus an overall rating of either “Gold”, “Silver” or “Bronze”. This choice of colours reflects our view that even relatively weak local authorities have strong credit quality. Data is sourced from published government statistics, which are themselves derived from returns submitted by local authorities.

What’s new?

We’ve updated the FSRs on iDealTrade to incorporate Q3 data from MHCLG and tweaked the methodology, removing the collection fund surplus from the “increase in council tax” indicator. We’ve also calculated FSRs for five new authorities that are active on the platform, created on 1st April 2019 following local government re-organisation. As well as the new authorities, there are seven other iDealTrade users who have changed overall score this quarter; three upgrades and four downgrades.

Recent Trends

We’ve seen a reduction in financial strength across local authorities in the third quarter of 2018/19, the average borrowing to reserves ratio is up by 4% on the quarter to 223% and interest paid as a proportion of adjusted tax base is up by 6%. Authorities continue to stretch their debt to reserve ratios (one measure of proportionality?), 21 councils increased borrowing by over 100% of their reserves in Q3 alone.

Coming soon

Current analysis covers English authorities only, but Arlingclose is expanding data collection and analysis to include other parts of the UK.

Relative Financial Strength

The chart below shows the dispersion of aggregate FSRs for authorities registered on iDealTrade, calculated by adding the scores achieved across each of the five risk metrics. Aggregate scores range from -5.1 for the weakest authority to 5.1% for the strongest, with the number of authorities achieving each score shown in the histogram below. To find out where your authority sits on this chart, just login or register at iDealTrade.net. Note, FSRs are only shown when bidding for loans on the platform, although, to keep you in control, there is an option to withhold ratings.

  

Why bother – aren’t all local authorities equally well protected?

This analysis has a variety of applications; understanding your authority’s own financial strength will be useful when setting the treasury and capital strategies, particularly when considering the proportionality of debt and appropriate reserve level. It’s also handy when approaching lenders, whether these are other authorities for short-term funding, gauging potential credit spreads on bond issues and private placements, or negotiating premature loan repayments. For authorities investing spare cash “local to local”, now a £11bn+ market, analysis of investment counterparties can aid compliance with the CIPFA Treasury Management Code of Practice and help avoid unwanted headlines.

Arlingclose client investment data for December revealed total investment exposure to local authorities of £3.7bn (35%) compared with just £2.4bn (23%) with banks and building societies. As most local authorities are unrated, there is an increasing demand for alternative credit risk analysis.

Find out more

Registered users on iDealTrade can view their own FSR, with no obligation to display the rating or trade (www.idealtrade.net / “new user”). Investors on iDealTrade can analyse the FSR of other authorities, where available, before completing a trade.

iDealTrade.net is owned and operated by Arlingclose Ltd.