'Lobo' casualty list lengthens as new victims surface

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The curse of the controversial Lobo loans, claimed to have cost council taxpayers millions of pounds while triggering huge profits for the banks that sold them, has struck again.

The Evening Standard revealed earlier this month how up to £15 billion of these “lender option, borrower option” loans were sold to local authorities, leaving them saddled with massive interest repayments. Now it emerges that up to 30 housing associations have also fallen victim to the loans, having bought up to £1.25 billion of them in the face of declining state subsidies.

The extent of the paper losses on these Lobos has led, in some cases, to fears the associations may have to curb their building programmes at a time of huge shortfalls in affordable housing. As with the local authorities, Lobo loans for housing associations were sold on an industrial scale by investment banks but have, in some cases, proved hugely costly as changes in accounting rules mean they will have to recognise how the Lobo debt liabilities have ballooned when valued at today’s market rate.

The new rules kick in this year, so housing associations now have to account for their Lobo debts.

Smith & Williamson partner Jonathan Pryor, a Lobo specialist, said market swings on such loans have left housing associations out of the money by up to 50% because of a drop in interest rates, and that will have to be reflected in their accounts for the first time.

Experts said the massive change could dent sentiment in housing associations’ building projects at a time when the stock of affordable housing is already set to fall under the Government’s move to force associations to offer tenants the right to buy their homes.

Pryor added: “Some associations may find it more difficult to win contracts because local authorities and government may be more concerned about their financial strength when they see these increases in the reported loan balance. It could also make housing association boards less confident since, if the balance sheet appears to be weaker, you might be less inclined to take more risk.”

Centrus managing partner Jonathan Clarke, who advises housing associations on Lobos, said: “If boards feel that [having Lobos] will complicate communicating with investors, there is an incentive to unpick them.”

The Standard has learned that many associations are having to renegotiate Lobos, in some cases stumping up big break fees to get out. Consultants say Barclays, which took a £900 million write-down on Lobos last year, has agreed to restructure up to £500 million of its housing association clients’ Lobo loans. The bank did not comment. Housing groups such as London-based Network Group and Thames Valley Housing have recently restructured their Lobos with the bank, changing the potentially extortionate rates into standard fixed-rate loans, Social Housing reports.

Details of those transactions are confidential but associations generally have to pay an upfront break fee to buy their way out of the deal or agree an increase in the annual interest rate of between 0.25% and 0.375%. On big loans, this can add up to millions of pounds.

Adrian Bell at broker Canaccord Genuity, who advises housing associations on restructuring Lobo deals, said banks, which made huge upfront profits when they sold the loans, were becoming increasingly worried about being sued. “They’re nervous some housing associations didn’t understand the full implications. It’s a reputational issue for them… the banks would prefer to avoid any situation where it could come to the courts,” Bell added.

He said banks have had to turn Lobos from “clever financial engineering” into “clever regulatory engineering” as they try to stave off a scandal and potential regulatory sanctions. Lobos have sparked controversy since the Standard told how they were sold to local councils on an industrial scale between 2002 and 2012 after an investigation by Debt Resistance UK. They were supposed to protect borrowers against high interest rates but, because of the derivative built into them, borrowers pay more when rates fall.

Borrowers have nicknamed the loans “Nobos” — “no other bloody option” — because of their riskiness. In some cases, payments between brokers and council consultants advising local authorities have prompted questions over the independence of advice councils received.

The influential Treasury Select Committee is exploring whether to hold an inquiry into the loans. Our exposé also prompted more than 60 MPs, councillors and campaign groups to call for action. Committee chairman Andrew Tyrie has said the issue was of serious concern. Canaccord Bell estimates that the Lobo deals of about six to 10 housing associations have been restructured so far, leaving 10 to  20 still on the books, with the new FRS 102 accounting rules looming large.

“You will effectively see a larger debtor,” National Housing Federation head of finance Joseph Carr said. “It’s not a cash movement. It’s a snapshot. But the accounts need to balance.”

Banks booked big upfront profits when the Lobos were sold but they have since become a major burden for them.

Source Article from http://www.standard.co.uk/business/business-news/lobo-casualty-list-lengthens-as-new-victims-surface-a3213286.html

March 30, 2016 |
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