Following the widely reported Newham / Barclays LOBO restructuring, (see room151.co.uk, Evening Standard and LocalGov) Arlingclose sets out its understanding of the transaction. This restructuring relates to relatively uncommon “range” LOBOs and is unlikely to be relevant to the majority of local authorities.
Arlingclose does not advise Newham Council but is familiar with their position on Barclays’ range LOBOs; we assisted a couple of our clients in removing the options from range LOBOs last year.
The majority of the £248m LOBO debt converted by Newham and Barclays was undertaken in June 2016, when Barclays waived the option on all its “vanilla” LOBOs. In this regard much of this story has already been well reported (clients can view our note on this here by searching “LOBO”).
Barclays also held a small portfolio of “range” LOBOs, where the rate paid depends on whether LIBOR sets within a defined range. To eliminate all the embedded derivatives from these loans, Barclays could not just waive the options, they also needed to convert the “range” component to a fixed rate, so some negotiation and restructuring was required.
It is unclear how the £94m saving figure has been calculated by Newham and details have not been disclosed, although a Freedom of Information request has already been lodged by debt activists. Arlingclose would expect a reasonably significant interest saving where range LOBOS have a large differential between the “in” and “out” of range rates, and loans have high principal values.
Barclays has confirmed our understanding of the nature of this transaction but obviously can’t disclose additional information relating to an individual authority.
The position regarding existing Barclays’ loans, where options have already been removed, is unchanged. While it is possible to negotiate premature redemption of these loans, significant redemption penalties will continue to apply.
We continue to believe that other banks will come under increasing pressure to restructure their LOBOs to the advantage of local authorities. This pressure comes from changes to accounting standards and capital adequacy regulations, as well as continued interest from politicians and lawyers into the circumstances that led local authorities into borrowing under this structure.
