Kent County Council has reached an agreement with Royal Bank of Scotland to pay back its LOBO loan debt early.
The council borrowed £60m from the bank between 2008 and 2011, with a 4% interest rate over the next 50 years.
These loans have now been paid back using a shorter-term Government loan at 2.5%, with a £13.4m premium paid to end the contract early.
Due to changes in accounting requirements, some banks are looking to reduce their Lender Option Borrower Option (LOBO) portfolios.
Kent CC explained that they were concerned RBS might sell their debt to a third party that might not exercise the ‘Lender Option.’ This would tie the council into a very long debt.
‘If we were able to prepay, it would enable us to manage our debt more flexibly and reduce long-term financing risk,’ a council statement said before the final decision to pay back the loan was taken.
‘If the prepayment terms are sufficiently favourable we would explore options to refinance the debt at a lower interest cost which would result in a net revenue saving.’
‘We are only likely to proceed if the saving from the difference between current financing and alternative refinancing is greater than this premium, creating a net saving on the council’s budget,’ the statement added.
