Weymouth and Portland Borough Council acted properly over £27 million of loans it took out almost 20 years ago.

The borrowing now sits with the Dorset Council, although £10m has since been changed to a different type of loan and £6m of it paid off.

The loans taken out by the former council, which was disbanded in 2019, were arranged in 2002 and 2003 and then rescheduled and extended in 2006, some not due to end until 2076.

A report was requested from accountants KPMG after a local elector objected to the 2016-17 accounts of the former borough council, in relation to the use of the Lender Option Borrower Option (LOBO) loans. The objector questioned whether they been good value for money and lawful.

LOBO loans have been criticised by some financial experts because they usually give banks an option every six months to increase the interest rate. Once that option has been exercised the lender then has the option to accept the increase, or repay the loan in full within a specified period, which can be as little as two working days from receiving notification to increase the interest rate.

A KPMG report published this week into the Weymouth and Portland loans concluded that “the LOBO loans were entered into appropriately and reasonably,” but is critical that some paperwork has not be found.

It says that the former borough council took into account all the relevant factors and guidance at the time and that there is “nothing to indicate any lack of prudence in the council’s actions in entering into the LOBO loans at the time.”

At least one senior councillor claimed that the loans saved local council taxpayers money.

KPMG say that some documentation relating to what advice was sought and obtained ‘is not specified and is no longer available’ which it describes as ‘regrettable’ but adds: “The auditor’s view was that, on balance, he had sufficient information available from the material documents; discussions with current council officers; and formal council / committee reporting to enable him to form a judgement on the objection…

“There is nothing to indicate that the approach taken by council officers and the formal reporting to members was inconsistent with what the auditor would expect to see for a local authority when making its treasury management decisions. The auditor’s understanding is that in these circumstances, the council was and continued to be entitled to proceed on the basis that the loans were entered into lawfully despite the limited contemporaneous documentation evidencing the process and decision making.”

The report says the loans were taken out by WPBC to restructuring its loan portfolio with the aim of producing revenue savings for the council.

The report details loans of –

£10m in July 2002 with Barclays with an initial 18 month interest rate of 2.2 per cent and then at 5 per cent. The loan to end in July 2042.

£11m with Bayerische Landesbank/Dresdner in December 2002, with a 16-month rate of 1.8 per cent and then for 4.8 per cent. The loan to end in December 2042.

£6m in May 2003 with Dresdner Kleinwort with an initial zero rate for a year and then 4.4 per cent interest. The loan to end in May 2043.

The rescheduling of the loans in November 2006 included the £10m from Barclays being extended until 2076 at a rate of 4.79%. This has since been converted to a different type of loan.

The Bayerische Landesbank loan for £11 million was agreed at a new rate of 4.59% with the length of the loan extended to 2076.

The £6m with Dresdner Bank was set at a new interest rate of 4.2% and extended to 2066. This was repaid in December 2018.

The £11m remaining LOBO loan was transferred to Dorset Council when reorganisation took place in the spring of last year.

Dorset Council say that as of 31 December 2019, it had outstanding LOBOs totalling £30.5m.

The council says it intends to review its investment and borrowing strategy during 2020/21.

The figure is less than half the amount the former county council had in LOBO loans – standing at £79.5m, about a third of its then total borrowing in the summer of 2018.

At the time, in August 2018, Dorset County Council Cabinet spokesman Cllr Tony Ferrari said that the previous councils had only taken out the loans when the rates offered were lower than the prevailing rate for a loan of the same duration from the Public Works Loan Board (PWLB) or other market sources.

He said at the time: “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.”

Former borough council leader Cllr Jeff Cant, said at the time the subject of LOBO loans at WPBC was first raised: “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.”