Over the past few weeks, we’ve seen a wave of restructuring proposals for LOBO (Lender Option Borrower Option) loans being pushed by brokers and advisors. These offers are being marketed as attractive opportunities for councils to tidy up their debt portfolios, but a closer look reveals reasons to be wary.
Let’s start with the biggest myth: that we’re on the cusp of a LOBO calling spree. In reality, most of these loans aren’t at imminent risk of being called. Yes, there have been some calls, typically for shorter-term or low-coupon loans, but many have sailed past their review dates untouched. We’ve even seen cases where 3.90% loans weren’t called.
That’s because the real power behind LOBO calls often lies not with the lender but with the banks providing the hedges, swap counterparties who aren’t exactly in a rush to give up their position. These swaps are still valuable, especially in a high-rate environment, and lenders would need to cough up serious premiums to unwind them. So no, widespread calls at par are not on the cards.
Some lenders, have indeed paid to exit hedges and are nudging authorities with offers to repay early. But these are isolated cases, and the bulk of LOBOs aren’t anywhere near this stage. Tools are available to assess whether a call is even likely; worth checking before making any decisions.
Then there’s the assumption baked into many of these restructuring pitches: if your LOBO is called, you’ll refinance with a long-term PWLB loan at the "certainty" rate. But that’s rarely how it works. Most councils use internal cash, short-term borrowing, or ten-year EIPs. There’s no meaningful change in risk here, given LOBOs typically have six-monthly call options anyway.
More worrying are the deals being described as “prepayments at par” that sneak a premium into the deal. The supposed “savings” are often based on inflated comparisons to notional loans at 6%, rather than looking at the real cost of refinancing or the probability of the loan being called in the first place.
A few other red flags? Some of these deals completely ignore the cost of funding the premium or the fact that the replacement debt could carry a higher rate than your existing loan.
Perhaps most concerning is the sense that some advisors are too close to the brokers and banks. History has shown the LA sector suffers when organisations link up like this. We’ve seen claims of exclusivity on deals, raising questions about who’s really being represented, and pressure to act quickly, always a red flag.
Our advice? Get a second opinion. And ideally, that opinion shouldn’t come from the same people who sold the original LOBOs. Independent advice is crucial, particularly on products that have proven so contentious.
At Arlingclose, we continue to negotiate directly with lenders, on your terms, not theirs. We’ve helped councils save millions without paying inflated premium costs. Don’t be rushed. Take your time, ask the right questions, and make sure the deal works for you, not the other way around.
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