Lloyds Bank and Santander have been mandated to raise the private debt, according to several market sources. The deal is scheduled to take place in mid-June.
The tenors will be fixed during the marketing process, though the maturities are likely to be 10-30 years. The amount is also not yet fixed, though one market source said he thought it would be £200m-£300m.
Lloyds and Santander both declined to comment, as did the City of London Corporation.
In May in its draft capital strategy the Corporation, a local government body responsible for London’s Square Mile area, said it is facing “a funding requirement of unprecedented scale”.
The Corporation wants to raise £3.36bn ($4.24bn) in the next few years to finance several infrastructure projects, including relocating the Museum of London, refurbishing the Guildhall, and moving the three wholesale food markets to a new site.
However, only a smaller part of that will come from borrowing.
Though the money set to be raised in the US PP market is not earmarked for a specific project, it is thought that much of it will finance relocating the markets.
The Corporation includes the City Fund, the arm responsible for local authority financing, and the City’s Cash, which is the Corporation’s endowment arm. The City Fund will borrow from the Public Works Loans Board (PWLB), part of the UK Debt Management Office that lends to local authorities.
However, the City's Cash will turn to banks and institutional lenders for investment.
According to the Corporation’s annual investment strategy, the City Fund’s capital expenditure is rising, from £49.5m in 2017-18 and £117m in 2018-19, to £211m this year, £183m in 2020-21 and £286m in 2021-22.
Its capital financing requirement — a measure of its outstanding debt — will also grow from £44.6m in 2017-18, £46.9m in 2018-19, £127m this year, £225m in 2020-21, and £400m in 2021-22.
The City’s Cash, meanwhile, will have capex of £59.3m in 2017-18, £201m in 2018-19, £174m this year, £156m in 2020-21, and £139m in 2021-22.
Its cumulative borrowing requirement will grow from zero in 2017-18 to £125m, £231m, £316m and then £428m in 2021-22.
For both the City Fund and the City’s Cash, the forecast borrowing requirements are similar to the operational limits followed by the City, which are in both cases £100m lower than the authorised maximum limits. This is to ensure the City is not constrained by a debt ceiling if a debt restructuring opportunity arises.
Funding the locals
For many years, UK local authorities have been almost entirely absent from institutional debt markets, due to legal constraints, but those are now easing and the prospects of councils raising private debt is often spoken of in the market.
According to several market sources, Birmingham City Council and Portsmouth City Council have held discussions with market participants in the last 18 months.
However, in both instances there has been a barrier: the PWLB.
Birmingham City Council, alongside an arranging bank, approached US PP investors in 2018.
“Everything made sense — credit quality, risk and maturity — until it came to the price,” said one investor. “They wanted pricing comparable to the [PWLB], which we just could not do.”
More than 70% of local authority debt flows from the PWLB, and councils can borrow from it at 80bp over Gilts.
Another investor said “it would be a tall order for PP investors to get to that price, unless the local borrower was an incredibly strong credit”, adding that they price UK universities in the low 100bp and UK schools in the mid-100bp, so councils would be likely priced in that region.
However, last October UK prime minister Theresa May labelled housing the UK’s largest domestic policy challenge, and said the government would remove caps preventing local councils from borrowing above certain levels against their housing revenue accounts (HRAs), in which they keep income from tenant rents and services.
“There are a few ifs, but that change could really bolster the chances of financing by the US PP market,” said one US PP agent.