A TYPE of loan which Dorset County Council and Weymouth and Portland Borough Council have £96.5 million tied up in is to be questioned at the High Court.

Fifteen councils are working together to challenge LOBO loan contracts which are often set at higher, variable rates of interest and can be expensive to end.

If the court challenge is successful it could give the two local councils greater freedoms to escape the loans, if they wanted to, possibly at a lower cost than the existing contract allows.

Both councils say they are currently happy with the LOBO (Lender Options Borrow Option) loans they have.

A challenge to what were two LOBO loans , at £27million, held by Weymouth and Portland Borough Council has delayed signing off the borough’s 2016-17 audit report and may yet delay the signing of the 2017-18 report.

The council has since converted £10m of those loans to another financial product leaving £17m outstanding in LOBO borrowing.

Auditors at KPMG have been investigating the value for money of the borough council’s loans after a public objection to the 2016-17 annual accounts. Said Cllr Colin Huckle: “There is a big penalty to get out of them….it would be in our interest that the case is won.”

The £17m was borrowed more than ten years ago from KA Finanz (originally Dresdner Bank) and KBC Bank. It amounts to 63 per cent of the council’s total outstanding debt. The current interest rates charged on the loans are 4.22 per cent (KA Finanz) and 4.59 per cent (KBC Bank).

Cllr Jeff Cant, Leader of Weymouth & Portland Borough Council, said: “The council carefully considers the short and long term effects of all funding options before any decision is taken. We have a sound financial management strategy in place. This has enabled us to balance our budget and continue to invest in ambitious regeneration plans as we look at major projects to improve our borough.

“Over the summer the council’s Statement of Accounts has been subject to a thorough examination and review by a team of external auditors from KPMG. KPMG concluded that the council has made proper arrangements to ensure value for money in its use of resources.”

Overall the auditors have given the WPBC accounts for 2017-18 a clean bill of health and say the way they work in partnership with West Dorset and North Dorset councils, offers the public value for money. The LOBO funds are considered as a separate issue.

In their report to the council at the end of July the auditors, KPMG, said: “Members will be aware that we received an objection to the 2016/17 accounts on the lawfulness and value for money of the council’s LOBO (Lender Option Borrower Option) loans. Our work on this is ongoing.”

The company is using its own specialists to carry out that investigation using a seperate team from those who audit the council annual accounts. Their time is being charged hourly, at an undisclosed rate, separately to the auditor’s £50,000 audit fee for the annual audit.

The court challenge to LOBOs held by other councils, centres around the way loan rates were set, possible commission payments made and the way the type of loans were marketed and sold by a number of different providers.

The objector to the borough council’s use of the loans questioned whether it had been good value for money and lawful.

KMPG senior auditor Ian Pennington, who has examined the end of year financial statements of the three councils of the Dorset Partnership, including Weymouth and Portland, said that he expected there would soon be some national guidance about the LOBO loans for financial experts to consider.

“As well as the borough council some 240 other LOBO loans were made,” he said.

Senior finance officer Jason Vaughan described the Weymouth and Portland LOBO loan as being ‘vanilla’: “It is what it says on the tin. Others are not,” he said.

Commented chair of the audit committee, Cllr Lucy Hamilton: “I’m reassured to see Weymouth and Portland way down at the bottom of the list. But it doesn’t get away from the lock-in.”

An examination of the borough council’s management committee agendas shows that at the end of March 2018 accounting period the borough declared one LOBO of £17million with an average annual interest rate of 4.46 per cent and one for £10million at an average pay back interest of 4.79 per cent.

The same accounts show that the council has £43.98million invested in a range on income generating funds.

KPMG define LOBO loans as: “A financial instrument where the lender has the option at set dates to request an interest rate increase and within a set number of days the borrower has the right to either agree the increase or repay the loan in full.”

Some councils are paying between 7 and 9 per cent interest rates, more than double what could now be achieved from the Public Works Loans Board.

In June Cabinet spokesman Cllr Tony Ferrari said that since the £79.5million in LOBO loans were taken out none of the lenders had exercised their option to increase rates.

“Dorset County Council’s current borrowing includes outstanding Lender Option Borrower Option (LOBO) agreements of £79.5M, representing approximately one third of all current borrowing. The remainder of the council’s borrowing consists of fixed rate, fixed term loans…

“If the council does not agree to a lender’s proposed change to the interest rate, then the loan can be repaid by the council without penalty,” he said.

Cllr Ferrari said that the County Council had only taken out the loans when the rates offered were lower than the prevailing rate for a loan for the same duration from the Public Works Loan Board or other market sources.

“Since these LOBOs were taken out, no lender has exercised their option to increase rates, therefore the council has benefited for a number of years from lower interest payments than if it had borrowed from the PWLB. The money saved by this has helped provide front-line services for those in most need.”