When it comes to repaying PWLB loans, there has long been a sense of “why bother?” when the repayment premium has been so punitively high for the last decade. However, with the rate environment having changed so quickly in the last few weeks and months, some local authority loans have moved from premium to discount territory.
Put simply, a premium is payable when the interest rate on the loan to be repaid is higher than the current premature repayment rate applied.
Conversely, when the interest rate on the loan to be repaid is lower than the current rate applying to the premature repayment, a discount is applied. The repayment rate for all durations is shown on the graphic below.
So as the repayment rates, which are linked to government gilts, rise as dramatically as they have, loans with a lower interest rate become attractive to repay at a discount. Is it really as simple as this though? Not really!
There are often added complications. How are you going to finance the repayment? Are you going to use investment balances to repay debt? If so, what are the returns you are receiving on those investment balances? If your investment returns were to be higher than the cost of repayment, there is less incentive to repay.
Alternatively, there is the option to borrow to repay that debt, but what if the rate of the new borrowing is higher? What would be the impact if you were to lengthen or shorten the new replacement borrowing? This could impact the degree of savings that the Council could achieve.
Arlingclose has tools on hand for clients to assess the premium and discounts of your debt portfolios. As shown on the graphic below, loans with rates below the repayment rate will be in a discount. Please note this repayment rate curve changes at each PWLB rate reset. Please contact your usual Arlingclose representative or email@example.com to discuss assessing any opportunities.