PART 1 ITEM NO. 6 REPORT OF THE EXECUTIVE LEAD MEMBER FOR FINANCE AND SUPPORT SERVICES TO COUNCIL ON WEDNESDAY, 18 NOVEMBER 2015

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1 PART 1 ITEM NO. 6 REPORT OF THE EXECUTIVE LEAD MEMBER FOR FINANCE AND SUPPORT SERVICES TO COUNCIL ON WEDNESDAY, 18 NOVEMBER 2015 TITLE: TREASURY MANAGEMENT STRATEGY UPDATE 2015/16 RECOMMENDATIONS: It is recommended that The City Mayor and Members note the contents of the report and approve the addition of property funds to the list of non-specified investments in the Annual Investment Strategy with an investment limit of 10M or 25% of the total investment portfolio, whichever is the lowest value. EXECUTIVE SUMMARY: This report provides a progress report on the treasury management strategy for 2015/16 and proposes some changes to the existing strategy in line with the changing financial environment. BACKGROUND DOCUMENTS: Various working papers in the Finance division including: Treasury management strategy 2015/16 reported to council on 26 February 2015 Treasury management practices TMPs 1 to 12 and supporting schedules Treasury management in the public services, code of practice and cross-sectoral guidance notes (CIPFA), CIPFA Code Treasury management in the public services, guidance notes for local authorities including police authorities and fire authorities (CIPFA), CIPFA guidance KEY DECISION: YES / NO DETAILS: overleaf 1

2 1 BACKGROUND 1.1 Treasury management is defined as: The management of the local authority s investments and cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities and the pursuit of optimum performance consistent with those risks. 2 INTRODUCTION 2.1 CIPFA issues best practice guidance on treasury management in the form of the CIPFA Code and CIPFA Guidance. 2.2 The council formally adopted the revised CIPFA Code and four specific clauses contained in it on 17 March The primary requirements of the Code are as follows: a. Creation and maintenance of a Treasury Management Policy Statement which sets out the policies and objectives of the council s treasury management activities. b. Creation and maintenance of Treasury Management Practices which set out the manner in which the council will seek to achieve those policies and objectives. c. Receipt by the full council of an annual Treasury Management Strategy Statement (TMSS) including the Annual Investment Strategy and Minimum Revenue Provision Policy for the year ahead, a mid year review report and an annual report covering activities during the previous year. d. Delegation by the council of responsibilities for implementing and monitoring treasury management policies and practices and for the execution and administration of treasury management decisions. e. Delegation by the council of the role of scrutiny of treasury management strategy and policies to a specific named body. The council delegated the scrutiny to the Assistant Mayor for Finance and Support Services and the Overview and Scrutiny Board. 2.4 The Treasury Management Strategy Report for 2015/16 was approved by the council on 26 February This report is the mid-year review report (ref. 2.3c above). 2.5 This report updates the City Mayor and Members on the treasury management strategy for the current year, in the light of borrowing and investment activity to date. 2.6 This mid year report has been prepared in compliance with CIPFA s Code of Practice, and covers the following which are discussed in more detail below: An economic update for the first six months of 2015/16 A review of the TMSS and Annual Investment Strategy 2015/16 A review of the Council s investment portfolio for 2015/16 A review of the Council s borrowing strategy for 2015/16 2

3 A review of any debt rescheduling undertaken during 2015/16 A review of compliance with Treasury and Prudential Limits for 2015/16 3 CHANGES TO THE TREASURY STRATEGY 3.1 The City Mayor and Members are requested to note and approve the following changes to the Treasury Management Strategy. 3.2 Changes in credit rating methodology The council uses the creditworthiness service provided by Capita Asset Services. This service uses a sophisticated modelling approach with credit ratings from all three ratings agencies Fitch, Moody s and Standard and Poor s - forming the core element. The City Mayor and Members are asked to note the following changes to the credit rating agencies methodologies: The main rating agencies (Fitch, Moody s and Standard & Poor s) have, through much of the financial crisis, provided some institutions with a ratings uplift due to implied levels of sovereign support. Commencing in 2015, in response to the evolving regulatory regime, all three agencies have begun removing these uplifts with the timing of the process determined by regulatory progress at the national level. The process has been part of a wider reassessment of methodologies by each of the rating agencies. In addition to the removal of implied support, new methodologies are now taking into account additional factors, such as regulatory capital levels. In some cases, these factors have netted each other off, to leave underlying ratings either unchanged or little changed. In keeping with the agencies new methodologies, the credit element of the Capita credit assessment process now focuses solely on the Short and Long Term ratings of an institution. While this is the same process that has always been used by Standard & Poor s, this has been a change to the use of Fitch and Moody s ratings. It should be noted that the other key elements of the Capita process have not been changed. It is important to stress that these rating agency changes do not reflect any changes in the underlying status or credit quality of the institution, merely a reassessment of their methodologies in light of enacted and future expected changes to the regulatory environment in which financial institutions operate. While some banks have received lower credit ratings as a result of these changes, this does not mean that they are suddenly less credit worthy than they were formerly. Rather, in the majority of cases, this mainly reflects the fact that implied sovereign government support has effectively been withdrawn from banks. They are now expected to have sufficiently strong balance sheets to be able to withstand foreseeable adverse financial circumstances without government support. In fact, in many cases, the balance sheets of banks are now much more robust than they were before the 2008 financial crisis when they had higher ratings than now. 3.3 Property funds The City Mayor and Members approval is sought to add property funds to the list of non-specified investments in the Annual Investment Strategy. 3

4 3.3.2 Property funds typically invest in a mix of commercial property including retail, industrial and office accommodation. The fund s value is derived from a mixture of capital values and rental income. Rental income can be realised immediately but any increase in value of the investment can only be gained by withdrawing the same from the fund Property funds are likely to realise a considerably higher rate of return than the type of specified and non-specified investments that the City Council currently invests in. Annual returns in excess of 5% would be expected compared to the average of 0.54% which was actually achieved during 2014/ The higher rate of return on a property fund compared to money market funds is achieved at the expense of liquidity, however, as it would be necessary to invest in a property fund for a period of 5 7 years in order to even out fluctuations in property markets and to minimise the impact of exit fees. The capital sum invested is not guaranteed as the value of the fund may decline as well as rise based on the performance of the property market during the investment period Officers have been reviewing available funds with the support of our treasury management advisers. An example of a fund which would be worth considering for inclusion in Salford s investment portfolio is the Local Authorities Property fund (LAPF). This is a fund which invests in property exclusively on behalf of local authorities and is administered by Churches, Charities and Local Authorities Fund Managers Ltd. The fund value at 31 March 2015 was 293M and there were 97 local authority investors in the fund at that date. This fund has generated an average annual rate of return of 12.6% over a 5 year period September 2009 to September Should the City Mayor and Members give their approval, any investment in a property fund would only be considered as part of a balanced portfolio of investments providing for a range of rates of return, liquidity and security In order to provide for investment in a property fund the City Mayor and Members are asked to approve the addition of property funds to the list of non-specified investments in the Annual Investment Strategy with an investment limit of 10M or 25% of the total investment portfolio, whichever is the lower value. 4 ECONOMIC UPDATE 4.1 Economic performance to date and outlook by region U.K. The UK GDP growth rate of 2.9% in 2014 was the strongest growth rate of any G7 country and the 2015 growth rate is likely to be a leading rate in the G7 again. The Bank of England s August Inflation Report included a forecast for growth to remain around 2.4% 2.8% over the next three years. However, the subsequent forward looking Purchasing Manager s Index, (PMI), surveys in both September and early October for the services and manufacturing sectors showed a marked slowdown in the likely future overall rate of GDP growth. This is not too surprising given the appreciation of Sterling against the Euro and weak growth in the EU, China and emerging markets creating headwinds for UK exporters. 4

5 Falls in business and consumer confidence in September, due to an increase in concerns for the economic outlook, could also contribute to a dampening of growth through weakening investment and consumer expenditure. For this recovery to become more balanced and sustainable in the longer term, the recovery still needs to move away from dependence on consumer expenditure and the housing market to manufacturing and investment expenditure. The strong growth since 2012 has resulted in unemployment falling quickly over the last few years although it has now edged up recently. after the Chancellor announced in July significant increases planned in the Governments National Living Wage over the course of this Parliament. The Monetary Policy Committee has been particularly concerned about the pressure on the disposable incomes of consumers due to price inflation. It has therefore been encouraging in 2015 to see wage inflation rising significantly above CPI inflation which slipped back to zero in June and again in August However, with the price of oil taking a fresh downward direction and Iran expected to soon rejoin the world oil market after the impending lifting of sanctions, there could be several more months of low inflation still to come, especially as world commodity prices have generally been depressed by the Chinese economic downturn. The August Bank of England Inflation Report forecast was notably subdued with inflation barely getting back up to the 2% target within the 2-3 year time horizon. There are therefore considerable risks around whether inflation will rise in the near future as strongly and as quickly as previously expected; this will make it more difficult for the central banks of both the US and the UK to raise rates as soon as had previously been expected, especially given the recent major concerns around the slowdown in Chinese growth, the knock on impact on the earnings of emerging countries from falling oil and commodity prices, and the volatility we have seen in equity and bond markets in 2015 so far, which could potentially spill over to impact the real economies rather than just financial markets. On the other hand, there are also concerns around the fact that the central banks of the UK and US have few monetary policy options left to them given that central rates are near to zero and huge Quantitative Easing (QE) is already in place. There are therefore arguments that there is a need to raise rates sooner rather than later so as to have scope to cuts rates later if there was a sudden second major financial crisis. But it is hardly likely that rates will be raised until it is sure that growth was securely embedded and deflation was not a significant threat. The forecast for the first increase in Bank Rate has therefore progressively been pushed back during 2015 from Q to Q and increases after that will be at a much slower pace, and to much lower levels than prevailed before 2008, as increases in Bank Rate will have a much bigger effect on heavily indebted consumers than they did before Rest of the World GDP growth for the U.S. in 2014 of 2.4% was followed by first quarter 2015 growth depressed by exceptionally bad winter weather at an annualised rate of only 0.6%. However, growth rebounded very strongly in Q2 to 3.9% (annualised) and continued strong growth was initially forecasted. Until the turmoil in financial markets in August caused by fears about the slowdown in Chinese growth, it had been strongly expected that the Federal Reserve might start to increase interest rates in September. However, the Fed. decided against that first increase due to global risks which might depress US growth and put downward pressure on inflation and due to a 20% appreciation of the dollar. Since then the non-farm payrolls figures for September and August were disappointingly weak and reinforced concerns that US growth is likely to significantly weaken. This has pushed back expectations of the first rate increase from 2015 into

6 In January 2015 the ECB announced a massive 1.1 trillion programme of QE to buy up high credit quality government debt of selected European Zone countries. This programme started in March and will run to September This seems to have already had a beneficial impact in improving confidence and sentiment. The ECB has also stated it would extend its QE programme if inflation failed to return to its target of 2% within this initial time period. During July, Greece finally capitulated to EU demands to implement a major programme of austerity and is now cooperating fully with EU demands. An 86bn third bailout package has since been agreed though it did nothing to address the unsupportable size of total debt compared to GDP. There are major doubts as to whether the size of cuts and degree of reforms required can be fully implemented and so Greek exit from the euro may only have been delayed by this latest bailout. Japan is causing considerable concern as the increase in sales tax in April 2014 has suppressed consumer expenditure and growth. In Q growth was 1.6% (annualised) after a short burst of strong growth in Q1. During 2015, Japan has been hit hard by the downturn in China. This does not bode well for Japan as the Abe government has already tried to stimulate recovery and a rise in inflation from near zero but has dithered over deregulation of protected and inefficient areas of the economy due to political lobbying. As for China, the Government has been very active during 2015 in implementing several stimulus measures to try to ensure the economy hits the growth target of 7% for the current year and to bring some stability after the major fall in the onshore Chinese stock market. Overall, China is still expected to achieve a growth figure that the EU would be envious of. However, concerns about whether the Chinese cooling of the economy could be heading for a hard landing, and the volatility of the Chinese stock market, have caused major volatility in global financial markets in August and September such that confidence is, at best, fragile. There are considerable concerns about the vulnerability of some emerging economies. Having borrowed massively in western currency denominated debt there are now pressures which are reversing that cash flow back to those western economies with strong growth and where there are likely to be rises in interest rates and bond yields. This change in investors strategy and the massive reverse cash flow has depressed emerging country currencies and, together with a rise in expectations of a start to central interest rate increases in the US and UK, has helped to cause the dollar and sterling to appreciate. In turn, this has made it much more costly for emerging countries to service their western debt at a time when their earnings from commodities are depressed. There are also going to be major issues when previously borrowed debt comes to maturity and requires refinancing at higher rates of interest. 6

7 4.2 Capita Asset Services interest rate forecast The Council s treasury advisor, Capita Asset Services, has provided the following forecast: Capita Asset Services undertook its last review of interest rate forecasts on 11 August shortly after the quarterly Bank of England Inflation Report. Later in August, fears around the slowdown in China and Japan caused major volatility in equities and bonds and sparked a flight from equities into safe havens like gilts and so caused PWLB rates to fall below the above forecasts for Q This latest forecast includes a first increase in Bank Rate in Q2 of Despite market turbulence since late August causing a sharp downturn in PWLB rates, the overall trend in the longer term will be for gilt yields and PWLB rates to rise when economic recovery is firmly established accompanied by rising inflation and consequent increases in Bank Rate and the eventual unwinding of QE. Increasing investor confidence in eventual world economic recovery is also likely to compound this effect as recovery will encourage investors to switch from bonds to equities The disappointing US non-farm payrolls figures and UK PMI services figures at the beginning of October have served to reinforce a trend of increasing concerns that growth is likely to be significantly weaker than had previously been expected. This, therefore, has markedly increased concerns, both in the US and UK, that growth is only being achieved by monetary policy being highly aggressive with central rates at near zero and huge QE in place. In turn this is also causing an increasing debate as to how realistic it will be for central banks to start on reversing such aggressive monetary policy until such time as strong growth rates are more firmly established and confidence increases that inflation is going to get back to around 2% within a 2-3 year time horizon. Market expectations in October for the first Bank Rate increase have therefore shifted back sharply into the second half of Downside risks to current forecasts for UK gilt yields and PWLB rates currently include: Geopolitical risks in Eastern Europe, the Middle East and Asia, increasing safe haven flows. UK economic growth turns significantly weaker than we currently anticipate. Weak growth or recession in the UK s main trading partners - the EU, US and China. A resurgence of the Eurozone sovereign debt crisis. 7

8 Recapitalisation of European banks requiring more government financial support. Emerging country economies, currencies and corporates destabilised by falling commodity prices and / or the start of Fed. rate increases, causing a flight to safe havens Upside risks to current forecasts for UK gilt yields and PWLB rates, especially for longer term PWLB rates include: - Uncertainty around the risk of a UK exit from the EU. The ECB severely disappointing financial markets with a programme of asset purchases which proves insufficient to significantly stimulate growth in the EZ. The commencement by the US Federal Reserve of increases in the Fed. funds rate causing a fundamental reassessment by investors of the relative risks of holding bonds as opposed to equities and leading to a major flight from bonds to equities. 5 TREASURY MANAGEMENT STRATEGY STATEMENT AND ANNUAL INVESTMENT STRATEGY UPDATE 5.1 The Treasury Management Strategy Statement (TMSS) for 2015/16 was approved by the council on 25 February The council s Annual Investment Strategy, which is incorporated into the TMSS, outlines the council s investment priorities as security of capital and liquidity. The council also aims to achieve the optimum return (yield) in investments, commensurate with the proper levels of security and liquidity. 5.2 In the current economic climate it is considered appropriate to keep a significant proportion of investments short term (less than 1 year) and only invest with high credit rated financial institutions or those guaranteed by the UK government, using Capita Asset Services suggested creditworthiness approach, including sovereign credit rating and credit default swap (CDS) overlay information provided by Capita Asset Services. 5.3 Borrowing rates have remained at historically low rates during the first six months of the 2015/16 financial year and are anticipated to remain so in the medium term (section 4.2). The council has continued its strategy of financing its current capital financing requirement with short term loans, primarily from other local authorities, in order to take advantage of these low interest rates. Consideration is currently being given to switching some short term debt to longer term so as not to miss the opportunity to lock into historically low rates. 5.4 In March 2015 the City council received 85.1M as a result of the housing stock transfer to Salix Homes. In view of the forecast increase in short term interest rates from Q it was decided that a prudent course of action would be to use this receipt to reduce the council s short term borrowing to militate against future interest rate rises. As a consequence of this the City Council s short term debt has reduced from 31/3/15 to 30/9/ Investments and borrowing during the first six months of the year have been in line with the strategy. 5.6 There is still uncertainty and volatility in the financial and banking market, both globally and in the UK (sections and 4.1.2). In this context it is considered that the strategy approved on 25 February 2015, subject to the amendments discussed in section 3 above, is still fit for purpose in the current economic climate. 8

9 6 INVESTMENT PORTFOLIO 2015/ In accordance with the CIPFA Code, it is the council s priority to ensure security of capital and liquidity and to obtain an appropriate level of return which is consistent with the council s risk appetite. 6.2 Investment rates available in the market continue to be low. The investment portfolio yield for the first six months of the year is 0.66% against a bench mark of 7 day LIBOR at 0.49%. Investment income earned to 30 September 2015 is 214,000 and is projected to be 550,000 by year end. 7 EXTERNAL BORROWING 7.1 The council s capital financing requirement (CFR) for 2015/16 is 623.5M (see Appendix 2) assuming no slippage in the capital programme. The CFR is the council s underlying need to borrow for capital expenditure purposes. 7.2 It is not anticipated that any additional borrowing will be taken during this financial year. Indeed, as per 4.4 above, short term borrowing has reduced during the period under review as a result of the application of the funds relating to the Salix stock transfer. 7.3 As shown below, the general trend in PWLB interest rates across longer dated maturity bands has been relatively flat during the six months with a modest peak in July. The 1 and 5 year rates ended the period somewhat higher reflecting in part an expected rise in US and UK bank rates. 9

10 PWLB certainty rates, half year ended 30 th September Year 5 Year 10 Year 25 Year 50 Year Low 1.11% 1.82% 2.40% 3.06% 3.01% Date 02/04/ /04/ /04/ /04/ /04/2015 High 1.35% 2.35% 3.06% 3.66% 3.58% Date 05/08/ /07/ /07/ /07/ /07/2015 Average 1.26% 2.12% 2.76% 3.39% 3.29% 10

11 8 DEBT RESCHEDULING 8.1 The City Council has over the last seven years or so been able to borrow at historically very low rates of interest to fund the capital programme. This borrowing pre-dominantly consists of a series of loans of duration of less than one year. When the loans reach maturity they are replaced with new short term loans which are subject to the prevailing interest rates at the time. This means that when interest rates do start to increase again the cost of servicing this short term debt will start to rise. 8.2 The prediction of the future movement of interest rates is a crucial element of treasury management due to the impact on variable rate debt. Interest rates are currently at historically low levels and, whilst we would want to make sure that we do not miss the opportunity to lock in some of our short term debt into longer term fixed rate borrowing, we also want to take advantage of the very low bank rates. At the point it is anticipated that interest rates are going to increase it would be prudent to consider replacing what is essentially variable rate existing short term debt with longer term fixed rate borrowing. This will provide certainty regarding future interest budget requirements. 8.3 In view of the above, consideration is now being given to replacing some of the short term borrowing with 25 year PWLB or other suitable loans in anticipation of interest rates beginning to increase and to take advantage of what are currently relatively favourable PWLB interest rates. 8.4 Interest payments on both long- (over one year) and short-term borrowing are set out below. To 30 September 2015 Forecast to 31 March 2016 Long-term borrowing (mainly financial market) Short-term borrowing (mainly ,637 14, LAs) Stock Total 6,466 16,162 9 COMPLIANCE WITH TREASURY AND PRUDENTIAL LIMITS 9.1 It is a statutory duty for the council to determine and keep under review its affordable borrowing limits. In determining its limits, the council must have regard to the Prudential Code and ensure that total capital investment remains with sustainable limits; in particular that the impact upon its future council tax / rent levels is acceptable. 9.2 The council s Treasury and Prudential Indicators are outlined in appendix 2. The council has complied with the limits in the review period. 11

12 10 LEASING 10.1 No new leases have been arranged during the review period Under the Prudential Code it is necessary to appraise the most beneficial means of funding assets. Appraisals of all available methods of funding are made in cases of material value. 11 BENCHMARKING 11.1 In order to aid The City Mayor and Members scrutiny of the authority s treasury management function a benchmarking exercise has been undertaken in respect of debt and investment levels for 2014/15 together with the associated interest rates. The results are shown in appendix The information collated relates mainly to other Greater Manchester authorities together with a small number of other authorities where information was readily available Salford s total debt at 31 March 2015 of 516.6M was relatively high compared to the other GM authorities with only Manchester having a higher level of debt at 519.1M. Salford s debt level has resulted from the City Council s decision to implement a substantial capital programme over recent years, with much of the funding from unsupported borrowing, in order to facilitate investment in a number of projects including the Chapel Street Corridor and MediaCity. It must be remembered, however, that Salford has subsequently repaid a considerable amount of short term loans (ref. 4.4 above) and total debt has reduced to 439.6M at 30 September Salford compares very favourably with other authorities in relation to the interest rate payable on borrowing. Salford s rate of 3.22% on its total debt at 31 March 2015 compares to an average of 4.55% for the other authorities in the benchmarking group. Had Salford been paying interest at this higher rate then it would have meant an additional interest charge of 6.9M based on Salford s debt of 516.6M. The favourable interest rate differential achieved by Salford has resulted from a policy of short term borrowing at very low rates of interest as discussed in section 5 above Salford s average rate of return on investments of 0.55% compares to 0.61% for the rest of the benchmarking group. This results from Salford s policy of investing for relatively short periods of less than twelve months in order to maintain liquidity of the investment funds. Investing for longer periods, for example, in a property fund for a minimum of five years, would achieve a higher rate of return and this is now being considered. As also mentioned above, the average rate of return on Salford s investment portfolio has increased to 0.66% for the first six months of 2015/16 which compares favourably to the benchmarking average of 0.61%. 12

13 12 CONCLUSION AND RECOMMENDATIONS 12.1 Investment returns are weak. The shortfall in income from investments is more than offset by savings in interest payments on borrowing as a result of the strategy of utilising short term borrowing in preference to long term loans in order to take advantage of the historically low interest rates currently available in the market The council has stayed within prudential limits in the review period The City Mayor and Members are requested to: Approve the addition of property funds to the list of non-specified investments in the Annual Investment Strategy with an investment limit of 10M or 25% of the total investment portfolio, whichever is the lower value. Note the contents of the rest of the report. Neil Thornton Director of Finance and Corporate Business 13

14 KEY COUNCIL POLICIES: Treasury management strategy; budget strategy. EQUALITY IMPACT ASSESSMENT AND IMPLICATIONS: Not applicable ASSESSMENT OF RISK: The monitoring and control of risk underpins all treasury management activities. The main risks are of adverse or unforeseen fluctuations in interest rates and security of capital sums. LEGAL IMPLICATIONS Supplied by: Richard Holmes, Principal Solicitor The Treasury Management Strategy sets out the Council's policies for managing its investments which includes giving priority to security and liquidity. The Local Government Act 2003 (the Act) and supporting regulations requires the Council to have regard to the Chartered Institute of Public Finance and Accountancy s (CIPFA) Prudential Code and the CIPFA Treasury Management Code of Practice to set Prudential and Treasury Indicators for the next three years to ensure that the Council s capital investment plans are affordable, prudent and sustainable. The Act therefore requires the Council to set out its Treasury Management Strategy at the start of each new financial year and to prepare an Annual Investment Strategy (as required by Investment Guidance subsequent to the Act); this sets out the Council s policies for managing its investments and for giving priority to the security and liquidity of those investments. The Council is also required to determine for the current financial year an amount of Minimum Revenue Provision (MRP) that it considers to be prudent. It is also required to submit a statement on the Council s policy for its annual MRP to the Council for approval before the start of the financial year to which the provision will relate. The Treasury Strategy Management 2015/16 was set out in a report to Council and approved by them on the 26 February This complied with the relevant requirements of the Local Government Act 2003 and the CIPFA Treasury Management Code. This further report to Council provides a progress report on the Treasury Management Strategy for 2015/16 and proposes some changes to the existing strategy in line with the changing financial environment. FINANCIAL IMPLICATIONS: This report has been prepared by the Finance division of the Customer & Support Services service group. The costs of borrowing: minimum revenue provision, interest and debt management expenses, are borne by the corporate capital financing budget. PROCUREMENT IMPLICATIONS provided by: Andrew White, Procurement Manager There are no procurement implications arising out of this report. 14

15 HR IMPLICATIONS provided by: Not applicable OTHER SERVICE GROUPS CONSULTED: Not applicable CONTACT OFFICERS: Paula Summersfield TEL NO: Andrew Tonge TEL NO: WARDS TO WHICH REPORT RELATES: None specifically. 15

16 Glossary of Terms Appendix 1 Base rate the rate at which the Bank of England offers loans to the wholesale banks, thereby controlling general interest rates in the economy. Capital financing requirement reflects the local authority underlying need to borrow for a capital purpose. Consolidated rate of interest (CRI) is the average rate of interest for external borrowing during the year. Fixed rate funding - a fixed rate of interest throughout the time of the loan. the rate is fixed at the start of the loan and therefore does not affect the volatility of the portfolio, until the debt matures and requires replacing at the interest rates relevant at that time. Gilts - The loan instruments by which the government borrows. Interest rates will reflect the level of interest shown by investors when the government auctions gilts. LOBO Lender offer, borrower option, a financial instrument where the lender may choose to vary the interest rate at certain break points. Only if the lender chooses to vary the interest rate, the borrower has an option to terminate the arrangement at no penalty. Market - The private sector institutions - banks, building societies etc. Maturity profile - an illustration of when debts are due to mature, and either have to be renewed or money found to pay off the debt. A high concentration in one year will make the council vulnerable to current interest rates in that year. Monetary Policy Committee (MPC) the independent body which determines base rate. PWLB - Public Works Loan Board. An institution managed by the government to provide loans to public bodies at rates which reflect the rates at which the government is able to sell gilts. Variable rate funding - The rate of interest either continually moves reflecting interest rates of the day, or can be tied to specific dates during the loan period. Rates may change on a monthly, quarterly or annual basis. Volatility - The degree to which the debt portfolio is affected by current interest rate movements. The more debt that matures in the year and needs replacing, and the more debt subject to variable interest rates, the greater the volatility. Yield curve - A graph of the relationship of interest rates to the length of the loan. A normal yield curve will show interest rates relatively low for short term loans compared to long term loans. An inverted yield curve is the opposite of this. 1

17 Appendix 2 Prudential and treasury indicators Prudential Indicators 2015/ / /18 Estimate Estimate Estimate M M M Capital Expenditure Non-HRA HRA Total Capital financing requirement(cfr) Non-HRA HRA Total Annual Change in CFR Non-HRA HRA Debt repayment provision MRP Total Ratio of financing costs to net revenue stream % % % Non-HRA HRA Incremental impact of capital investment decisions Increase in band D council tax per annum Increase in average housing rent per week

18 3

19 Appendix 2 (cont) Treasury Management Indicators 2015/ / /18 Forecast Estimate Estimate M M M Authorised Limit for External Debt Borrowing Other long term liabilities Total Operational Boundary for External Debt Borrowing Other long term liabilities Total Actual External Debt Upper limit for fixed interest exposure 100% 100% 100% Upper limit for variable rate exposure 50% 50% 50% Upper limit for total principal sums invested for over 364 days 40M 40M 40M Treasury management activity has stayed within the limits for the first six months of 2015/16: These indicators should be considered together. The current proportion of variable interest rate is 25% but in any event it is highly improbable that LOBO rates will actually vary over the next few years, as the interest rates already exceed current rates and the option to change lies with the banks. The use of short term borrowing, 142.8M of the 439.6M portfolio (32.5%) at 30 September, carries a much higher risk as it is exposed to any fluctuation in interest rates. As an example, there is currently a c.3.0% differential between short term interest rates and 25 year PWLB rates. Although the current strategy is to utilise very low short term rates, eventually rates will start to rise and the short term debt will be converted into longer term borrowings. The current cost of switching 10m from short term to 25 years PWLB would be 0.3m per annum. 4

20 Treasury Management Benchmarking 31 March 2015 Appendix 3 Loan Type SALFORD MANCHESTER WIGAN TRAFFORD TAMESIDE ROCHDALE March Rate/ March Rate/ March Rate/ March Rate/ March Rate/ March Rate/ 2015 Return 2015 Return 2015 Return 2015 Return 2015 Return 2015 Return M % M % M % M % M % M % PWLB Temporary loans Market loans Other 3.1 Stock/Transferred Debt Total debt Less: total investments Net debt Loan Type SALFORD BURY STOCKPORT EASTBOURNE NORTHUMBERLAND NOTTINGHAM March Rate/ March Rate/ March Rate/ March Rate/ March Rate/ March Rate/ 2015 Return 2015 Return 2015 Return 2015 Return 2015 Return 2015 Return M % M % M % M % M % M % PWLB Temporary loans Market loans Other 1.3 Stock/Transferred Debt Total debt Less: total investments Net debt