How to Expand the Muni-Bond Market in the U.K.? Hire Americans

(Bloomberg) --

The local governments of the U.K. are borrowing a page from their former colonial subjects on the other side of the Atlantic Ocean.

The U.K. Municipal Bonds Agency hired Philadelphia-based Public Financial Management, the largest financial adviser to American states and cities, to guide it on how to float debt to finance infrastructure projects on behalf of British local governments.

Such bond sales are a $400 billion-a-year business in the U.S., where most of the burden for keeping up roads, bridges and airports falls to tens of thousands of local agencies. But in the U.K., they have been far more rare because governments can borrow directly from the Public Works Loan Board, an arm of the Treasury.

“The loan board was so easy to use,” explained David Blake, a client director at Arlingclose who advises local governments on debt management. “They would phone the board up, answer a few questions and millions of dollars is in their accounts days later. It was fantastically flexible.”

The local agencies may have more incentive to borrow through the bond market because of the Treasury’s decision in October to raise the interest rate for borrowers by one percentage point to 1.8 percentage point above what the U.K. government pays. That step came after some started borrowing more from the agency after interest rates slid.

June Matte, a managing director at PFM in London, said the loan board’s decision could lead more localities to turn to the bond market, where she estimates they can borrow at significantly lower rates.

“So all of a sudden, the interest from local governments is coming out of the woodwork,” she said. “A lot of things have aligned for us, but we think there is the opportunity to get a local government bond bank off the ground.”

The U.K. Municipal Bonds Agency was created in 2014 but has yet to sell any debt. It was initially modeled after an agency in Denmark and could have left localities partly responsible for loans taken out by others. PFM’s has recommended shifting toward a more American pooled system, in which their obligations are proportional to what they borrow so no government would be singled out to make good on another’s default.

The agency expects to sell its first pooled bonds by the end of the first quarter of 2020, said Matte, with HSBC hired to arrange the offering through a syndicate that also includes Bank of America Corp. and JPMorgan Chase & Co. She said it’s also possible that bonds will be sold on behalf of a single locality as soon as the end of January.

The agency could herald a major change in the way infrastructure is funded in the U.K., said Mike Jensen, chief investment officer at the Lancashire County Council. He said that after nearly a decade of fiscal austerity, officials are in need of new ways to finance needed work on infrastructure.

“The agency could fly and very quickly become the default source of long term capital for U.K. local authorities,” Jensen said.

To contact the reporter on this story: Danielle Moran in New York at dmoran21@bloomberg.net

To contact the editors responsible for this story: Elizabeth Campbell at ecampbell14@bloomberg.net, William Selway, Michael B. Marois

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