Should Universities Lend to Local Authorities?

With financial pressures continuing across the higher education sector, universities are increasingly focused on making the most of their cash balances. Maintaining liquidity and protecting capital remain the fundamental treasury priorities, but securing competitive investment returns is also important and can help alleviate the cost and income pressures many in the sector have been experiencing.

Lending directly to UK local authorities offers universities an attractive combination of strong credit quality, competitive short-term investment rates and straightforward execution.

Strong Sub-Sovereign Credit Quality

UK local authorities occupy a distinctive position in the investment market, benefiting from strong sub-sovereign credit characteristics supported by their statutory responsibilities, revenue-raising powers and established public sector funding arrangements.

Unlike commercial organisations, local authorities cannot enter conventional corporate insolvency proceedings. They operate within a statutory financial framework, are subject to government oversight and have access to established borrowing arrangements, including the Public Works Loan Board (PWLB), operating as lender of last resort, essentially ensuring universities’ capital is returned.

While local authority borrowing is not explicitly guaranteed by central government, the sector's statutory framework provides important credit strengths that distinguish it from conventional corporate lending.

For universities seeking to diversify beyond traditional bank deposits and money market funds, local authority lending provides exposure to a well-established public sector credit market, subject to appropriate counterparty assessment and investment limits.

Competitive Short-Term Investment Rates

Alongside credit quality, local authority lending can offer particularly attractive short-term investment returns.

Local authorities regularly borrow for periods ranging from a few weeks to several months, creating opportunities for universities to invest surplus cash at competitive fixed rates.

Depending on market conditions, these rates can exceed those available through money market funds, bank deposits and UK T-bills, without necessarily requiring longer investment maturities.

Even relatively modest yield improvements can generate meaningful additional income. For example, achieving an additional 0.25% on a £10 million investment held for six months would generate approximately £12,500 in additional interest.

Universities can also select investment maturities that complement their cashflow forecasts, ensuring funds become available when required to meet operational expenditure, capital projects or other financial commitments.

Easy Access Through iDealTrade

Historically, accessing local authority lending opportunities involved contacting individual authorities or dealing through brokers, potentially limiting market visibility and increasing administration.

iDealTrade, Arlingclose's digital lending platform, makes accessing these opportunities considerably easier.

The platform allows investors to view available borrowing requirements, compare interest rates and maturities, and identify transactions aligned with their investment objectives.

Key features include:

• Market intelligence: Visibility of available lending opportunities, advertised interest rates and borrowing requirements.
• Flexible transactions: Opportunities to invest different amounts and partially fulfil larger borrowing requirements.
• Credit information: Financial strength information to support counterparty assessments.
• Automated matching: Notifications when suitable investment opportunities become available.
• Simplified execution: Standardised documentation and streamlined transaction processes.

These features make it easier for universities to access competitive investment opportunities while maintaining control over counterparty selection, investment maturities and liquidity.

Local Authorities & ESG

Lending to local authorities can also complement universities’ Environmental, Social and Governance (ESG) policies. Local authorities play a central role in delivering essential public services, supporting local communities, social care, developing infrastructure and advancing environmental initiatives, including net zero commitments.

By investing in the sector, universities can align their treasury activities with broader social and environmental objectives while supporting public sector organisations that contribute directly to regional economic development.

Although individual investments are not necessarily ring-fenced for specific ESG projects, local authority lending offers an opportunity to combine financial returns with wider institutional values.

An Opportunity Worth Exploring

For universities looking to diversify their investment portfolios and improve returns without compromising their approach to security and liquidity, local authority lending deserves serious consideration.

Combining strong sub-sovereign credit characteristics, attractive short-term rates and convenient market access through iDealTrade, it offers a practical way for universities to make more effective use of their surplus cash.

For more information, please contact Stuart Jones at sjones@arlingclose.com.