02.08.18
Lancashire CC’s accounts held up over contentious £50m ‘LOBO’ loan
The approval of Lancashire County Council’s accounts has been put on hold following a dispute over the registering of a contentious £50m loan.
Conducting the council’s annual audit, and presented to the authority’s audit, risk, and governance committee on Monday, auditor Grant Thornton queried about how Lancashire CC should log the a £50m Lender Option Borrower Option (LOBO) loan taken out in 2010.
The LOBO loans allow private banks to propose or impose a new fixed rate on a pre-determined future start date; the borrower can choose to accept this rate or repay the loan in full, but there are no breakage penalties at this point. Breakage penalties only apply if the borrower wants to repay at another point in time or when the rate is not changed — the same conditions as a fixed-rate loan would be.
In its official audit document, Grant Thornton noted that LOBO loans have been subject “to significant public scrutiny” in recent years and, during this year’s financial audit, increased scrutiny has been placed on such financial instruments in terms of legality, value for money, and accounting treatment.
The report added: “The council’s loan is a specific complex variant being inverse floating rate LOBO loans. These types of loan are currently held by only a small number of local authorities.”
It is believed the council’s accounts are being held up due to the rarer type of loan as an “inverse floating rate LOBO.” This is where the lender’s interest rate placed upon Lancashire CC moves in the opposite direction to the market rate.
LOBO loans have been making the headlines recently: last month 14 major authorities including Greater Manchester, Liverpool, and Bristol launched a court battle accusing Barclays of fraud over the LOBO loans.
Speaking to the council’s audit committee, Mike Thomas, director at Grant Thornton, said that accounting treatment for the controversial loans can be “slightly different” due to the variants in the type of LOBO loan granted.
He noted: “As with many accounting standards, there are grey areas and judgment calls. When these loans were entered into it was never envisioned that there would be anything other than ‘vanilla’ LOBOs, but it has now come to light that there are a number of variants.”
Angie Ridgwell, interim chief executive and director of resources at Lancashire CC, said: "It is disappointing that one technical item has held up the process, however our external auditors must form an independent view and they need more time while they seek further technical advice around the accounting treatment.
"There are a number of other councils who hold similar loans and have had their accounts approved, so I hope that this situation will be resolved for Lancashire shortly."
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