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By Craig McGlashan 02 Feb 2015
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RatingvitaltonewUKissuer’spricehopes
AnewUKmunicipalbondagency’splanstoreduceitsmembers’costoffunding
versusGiltswillhangonitscreditratingspreadtotheUKgovernment,SSAbankers
saidonMonday.AnewUKsub-sovereignissuer—theScottishgovernment—is
likelytoattainpricingsimilartothenewagency,saidbankers.Elsewhereinsterling,
BankNederlandseGemeententappeditsDecember2018sfor£50m.
Almost 50 local authorities in the UK have signed up to support the Local Capital Finance
Company, which will raise funds on the capital markets and lend to its members, in a
similar fashion to agencies like Finland’s Municipality Finance.
Most UK council borrowing comes from the Public Works Loans Board at a rate of 80bp
above Gilts, but the agency believes it could lend to councils at a spread of 55bp­60bp
over the next two to three years — and tighten even further in the longer run. Its loans will
carry a 10bp premium over its cost of funding.
Whether the LCFC can achieve the necessary spread will depend heavily on its credit
rating, said SSA bankers.
“We used to have Network Rail which had a similar rating to the UK government and paid
a spread of around 30bp over Gilts in sterling,” said a head of SSA DCM.
“The new French municipal bond agency, Agence France Locale, is one rating below the
French government, for instance.”
Unlike Network Rail, which has an explicit guarantee from the UK government, the French
agency AFL — which plans to sell its debut bond in early 2015 — has an explicit joint and
several guarantee from its member local authorities. The new UK agency has a similar
structure.
But when rating AFL late last week, Moody’s factored implicit sovereign support into its
rating for the issuer, “reflecting the reputational damage for both the French sovereign and
local public sector that would result from a default of AFL”, the ratings agency said. AFL is
rated Aa2 by Moody’s, one notch below France.
The devolved Scottish government will also be able to issue bonds from April — the same
month as the LCFC intends to begin printing — and will price its debt at a similar level to
the new municipal bond agency, said SSA bankers.
“The LCFC’s estimate is definitely achievable,” said a head of SSA syndicate. “Municipal
bond agencies tend to price their bonds around 25bp­30bp over governments generally.
I’d expect Scotland to price in line with that.”

2. By Craig McGlashan 02 Feb 2015
Scotland will be able to borrow up to a total limit of £2.2bn, although it may be granted
extra borrowing powers as part of promises made by the pro­union campaign during last
year’s Scottish independence referendum. It will not have an explicit guarantee from the
UK.
The LCFC’s first deal is likely to be £250m­£300m and it will sell a maximum of two bonds
during its first year, according to a spokesman. It expects to reach £2bn in lending volume
within the next three years.
Solesterlingdeal
BNG tapped its December 2018s for £50m on Monday, taking the total outstanding
amount to £1bn.
Sole lead RBC Capital Markets priced the tap at 31bp over the July 2018 Gilt, in line with
guidance of 31bp area.
The deal followed reverse enquiries for the bond, GlobalCapital understands.