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case study

ADDRESSING LOBOs

Background

JCRA brought together experts from its derivatives, capital markets and hedge accounting advisory teams to advise Newham Council on over £200m Range LOBOs. The Council had signed up to the loans in 2007-08 as a means of refinancing PWLB borrowing on which it was paying rates in excess of 10%.
 

However, as a result of falling interest rates, these very long term Range LOBO loans became expensive for the Council and unattractive to the bank who made the loans. Unlike many LOBOs the bank was unable to simply walk away from the LOBO element of the loans; it also needed to restructure the Range feature.
 

JCRA was invited by the Council to tender to advise them on an offer to restructure the loans that it had received from the bank after lengthy negotiations.
 

The structure of the loans was extremely complex but due to JCRA’s specialist expertise and modelling capacity, it was able to advise the Council not only on whether the offer was "at market", but also assist it to evaluate whether the transaction was worth executing in the short and medium term. Thereby assisting the Council in delivering its value for money and governance obligations in respect of a complex, structured treasury restructure.

200m
£200m Range LOBOs
1.6
£1.6m annual interest bill reduced
Speak to an expert

Henrietta Podd

Director

E: Henrietta.Podd@jcrauk.com
T: +44 (0) 207 493 3310

Our approach

Benchmarks for success were established

JCRA looked at a number of scenarios including refinancing the loans

Supported the Council in negotiating a better offer from the bank increasing the annual savings achieved

Advised on structuring the restated loans so that the arrangement did not give rise to any adverse accounting consequences

Assisted the Council to obtain the appropriate sign off from its auditors

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Benefits of our approach

  • It materially reduced the annual interest bill by c £1.6 m pa or £94m over the life of the loan;
  • It turned a short term creditor (due to the LOBO) into a long term creditor, giving the Council certainty of funding and improving its credit; 
  • It reduced the ongoing mark to market of the loans (albeit these are not recognised on balance sheet);
  • It modernised the documentation on the loans and clarified a number of ambiguous terms; and
  • It maintained a positive relationship with one of the Council’s largest lender. 

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