Bonds are fixed-income securities that can be issued by a local authority to obtain debt funding for green projects.
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Bonds are a form of borrowing, where investors are given a guaranteed fixed return (fixed-income securities), which can be issued by a local authority to obtain debt funding for projects. Bonds can focus on particular types of projects, for example for local energy projects ‘green’ bonds would be appropriate.
The costs, time and fees involved make this option rare. The amount borrowed should be large enough to justify the costs incurred in the transaction. These include a credit rating issued by an international rating agency.
- Finance source: Institutional investors; private sector investors; local community, if specifically involved
- Funded project phase: Build, operate
- Typical project size: £1 million to £250 million+
- Match funding: No
- Security: Local authority’s general income sources. The bonds are not secured (mortgaged or equivalent) on any local authority assets
- Speed of accessing finance: variable
Municipal bonds can be a good way to raise money for local infrastructure. The UK Municipal Bonds Agency (UKMBA) provides support and documentation for issuing municipal bonds. However, only councils with a credit score of ‘A’ or higher will be eligible to borrow through the UKMBA’s proportionally guaranteed bond issues.
A municipal bond raises money (borrowing) in the bond market through the issuance of bonds. These are issued by local authorities to pay for local capital programmes such as infrastructure projects, maintenance of roads, and the construction and upkeep of council properties by local authorities.
The local authority borrows money from one or more investors for a defined period at an agreed interest rate (usually fixed for the life of the bond), as you would do with a personal loan. The borrower (local authority) pays interest to the bond investor, typically every 6 months, for the duration of the term, until the debt has been paid off in full.
Unlike the PWLB, which can suddenly raise interest rates without warning, the rates paid on municipal bonds are determined by the financial markets at the time of the bond issue, so they are not susceptible to non-market (political) fluctuations (although they are subject to market fluctuations). This means local authorities can have more control over their debt and are protected from unexpected PWLB changes.
The UK Municipal Bonds Agency has 3 lending programmes (Municipal Bonds Agency, 2021):
- Proportionally guaranteed, pooled loans of £1 million or more for maturities greater than one year. The proportional guarantee groups the collective creditworthiness of all the local authorities accessing the programme.
- Standalone loans to a single local authority for £250 million or more for maturities greater than one year. These loans do not benefit from UKMBA’s proportional guarantee and are guaranteed solely by the borrower, who must obtain an external credit rating from one or more of the major credit rating agencies.
- Short-term, pooled loans, outside of the proportional guarantee for maturities of less than one year.
Recently The Green Finance Institute and Abundance Investment, supported by UK100, Local Partnerships and Innovate UK, launched Local Climate Bonds (Green Finance Institute, 2021).
Key benefits
The key benefits of municipal bonds to local authorities are:
- Savings due to lower interest rates, which reflect the lower risk to investors resulting from the guarantee structure
- Protection from changes to the PWLB’s terms and conditions and diversified funding sources
- Fully transparent pricing in relation to Public Work Loan Board debt
- Tailored products to suit local authorities’ needs
- Economies of scale thereby reducing costs (UKMBA operates under a framework agreement with local authorities which standardises the bond documentation, making issuance quicker and cheaper for both borrowers and investors)
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