Appendix A
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TREASURY MANAGEMENT POLICY AND STRATEGY 2022/23 |
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CONTENTS
1. INTRODUCTION
1.1. Background
1.2. Reporting Requirements
1.3. Treasury Management Strategy for 2022/23
1.4. Treasury Management Policy Statement
1.5. Current Portfolio Position
2. BORROWING STRATEGY
2.1. Borrowing Strategy for 2022/23
2.2. Policy for Borrowing in Advance of Need
2.3. Debt Rescheduling
2.4. Interest Rate Risk & Continual Review
3. MINIMUM REVENUE PROVISION POLICY STATEMENT
4. ANNUAL INVESTMENT STRATEGY
4.1. Annual Investment Strategy for 2022/23
4.2. Investment Policy – Management of Risk
4.3. Sovereign Credit Ratings
4.4. Creditworthiness Policy
5. OTHER TREASURY ISSUES
5.1. Banking Services
5.2. Training
5.3. Policy on the use of External Service Providers
5.4. Lending to Third Parties
5.5. Updates to Accounting Requirements
ANNEXES:
Annex A Counterparty List
Annex B Economic Background & Prospect for Interest Rates
Annex C Prudential & Treasury Indicators
Annex D Scheme of Delegation
Annex E Investment Product Glossary
1. INTRODUCTION
1.1 Background
The Council is required to operate a balanced budget, which broadly means that cash raised during the year will meet cash expenditure. Part of the treasury management operation is to ensure that this cash flow is adequately planned, with cash being available when it is needed. Surplus monies are invested in counterparties or instruments commensurate with the Council’s risk appetite, providing adequate liquidity initially before considering investment return.
The second main function of the treasury management service is the funding of the Council’s capital plans. These capital plans provide a guide to the borrowing need of the Council, essentially the longer-term cash flow planning, to ensure that the Council can meet its capital spending obligations. This management of longer-term cash may involve arranging long or short-term loans or using longer-term cash flow surpluses. On occasion, when it is prudent and economic, any debt previously drawn may be restructured to meet Council risk or cost objectives.
The contribution the treasury management function makes to the authority is critical, as the balance of debt and investment operations ensure liquidity or the ability to meet spending commitments as they fall due, either on day-to-day revenue or for larger capital projects. The treasury operations will see a balance of the interest costs of debt and the investment income arising from cash deposits affecting the available budget. Since cash balances generally result from reserves and balances, it is paramount to ensure adequate security of the sums invested, as a loss of principal will in effect result in a loss to the General Fund Balance.
CIPFA defines treasury management as:
“The management of the local authority’s borrowing, 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.”
1.2 Reporting Requirements
1.2.1 Capital Strategy
The CIPFA 2017 Prudential and Treasury Management Codes require all local authorities to prepare a capital strategy report, to provide the following:
· a high-level long term overview of how capital expenditure, capital financing and treasury management activity contribute to the provision of services
· an overview of how the associated risk is managed
· the implications for future financial sustainability
The aim of the capital strategy is to ensure that all elected members on the full Council fully understand the overall long-term policy objectives and resulting capital strategy requirements, governance procedures and risk appetite.
This capital strategy is reported separately from the Treasury Management Strategy Statement; non-treasury investments will be reported through the former. This ensures the separation of the core treasury function under security, liquidity and yield principles, and the policy and commercialism investments usually driven by expenditure on an asset.
1.2.2 Treasury Management reporting
The Council is currently required to receive and approve, as a minimum, three main treasury reports each year, which incorporate a variety of policies, estimates and actuals.
a. Prudential and treasury indicators and treasury strategy (this report) - The first, and most important report is forward looking and covers:
· the capital plans, (including prudential indicators);
· a minimum revenue provision (MRP) policy, (how residual capital expenditure is charged to revenue over time);
· the treasury management strategy, (how the investments and borrowings are to be organised), including treasury indicators; and
· an investment strategy, (the parameters on how investments are to be managed).
b. A mid-year treasury management report – This is primarily a progress report and will update members on the capital position, amending prudential indicators as necessary, and whether any policies require revision.
c. An annual treasury report – This is a backward looking review document and provides details of a selection of actual prudential and treasury indicators and actual treasury operations compared to the estimates within the strategy.
This Council delegates responsibility for implementation and monitoring treasury management to Cabinet and responsibility for the execution and administration of treasury management decisions to the Section 151 Officer. Cabinet therefore receives the Mid Year and Annual treasury reports in December each year.
The above reports are required to be adequately scrutinised before being recommended to the Council. This role is undertaken by the Audit Committee.
1.3 Treasury Management Strategy for 2022/23
The strategy for 2022/23 covers two main areas:
- the capital expenditure plans (section 2) and the associated prudential indicators (Annex C);
- the minimum revenue provision (MRP) policy (Section 3).
Treasury management issues
- the current treasury position (section 1.5);
- treasury indicators which limit the treasury risk and activities of the Council (Annex C);
- prospects for interest rates (Annex B);
- the borrowing strategy (section 2);
- policy on borrowing in advance of need (section 2.2);
- debt rescheduling (section 2.3);
- the investment strategy (section 4);
- creditworthiness policy (section 4.4); and
- the policy on use of external service provider (section 5.3).
These elements cover the requirements of the Local Government Act 2003, the CIPFA Prudential Code, DLUHC MRP Guidance, the CIPFA Treasury Management Code and DLUHC Investment Guidance.
1.4 Treasury Management Policy Statement
The policies and objectives of the Council’s treasury management activities are as follows:
i) This Council defines its treasury management activities as:
‘The management of the 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’.
ii) This Council regards the successful identification, monitoring and control of risk to be the prime criteria by which the effectiveness of its treasury management activities will be measured. Accordingly, the analysis and reporting of treasury management activities will focus on their risk implications for the Council, and any financial instruments entered into to manage these risks.
iii) This Council acknowledges that effective treasury management will provide support towards the achievement of its business and service objectives. It is therefore committed to the principles of achieving value for money in treasury management, and to employing suitable comprehensive performance management techniques, within the context of effective risk management.
1.5 Current Treasury Position
A summary of the Council’s borrowing & investment portfolios as at 30th November 2021 and forecast at the end of the financial year is shown in Table 1 below:
|
Table 1 |
Actual at 30 November 2021 |
Forecast to 31 March 2022 |
||||
|
|
£’000 |
% of portfolio |
Average Rate |
£’000 |
% of portfolio |
Average Rate |
|
Investments |
|
|
|
|
|
|
|
Banks |
174,000 |
55% |
0.26% |
160,000 |
55% |
0.30% |
|
Local Authorities |
80,350 |
25% |
0.66% |
70,000 |
24% |
0.60% |
|
Money Market Funds |
59,650 |
18% |
0.04% |
55,000
|
19% |
0.10% |
|
CCLA Pooled Property Fund |
5,000 |
2% |
3.80% |
5,000 |
2% |
3.75% |
|
Total Investments |
319,000 |
100% |
0.38% |
290,000 |
100% |
0.40% |
|
|
|
|
|
|
|
|
|
Borrowing |
|
|
|
|
|
|
|
PWLB loans |
222,000 |
95% |
4.67% |
220,000 |
95% |
4.65% |
|
Market loans |
12,900 |
5% |
4.00% |
12,900 |
5% |
4.00% |
|
Total external Borrowing |
234,900 |
100% |
4.64% |
232,900 |
100% |
4.62% |
2. BORROWING STRATEGY
The capital expenditure plans of the Council are set out in the Capital Strategy Report being considered by Full Council on 8 February 2022. The treasury management function ensures that the Council’s cash is organised in accordance with the relevant professional codes so that sufficient cash is available to meet the capital expenditure plans.
Any capital investment that is not funded from these new and/or existing resources (e.g. capital grants, receipts from asset sales, revenue contributions or earmarked reserves) increases the Council’s need to borrow. However, external borrowing does not have to take place immediately to finance its related capital expenditure: the Council can utilise cash being held for other purposes (such as earmarked reserves and working capital balances) to temporarily defer the need for external borrowing. This is known as ‘internal borrowing’.
The Council’s primary objective is to strike an appropriate balance between securing cost certainty, securing low interest rates. The Council’s cumulative need to borrow is known as the Capital Financing Requirement (CFR). The CFR and the actual level of external borrowing will differ according to decisions made to react to expected changes in interest rates and the prevailing economic environment. Where a decision to defer borrowing (or internally borrow) is made, the Council will be under borrowed. Where a decision to borrow in advance of need to secure cost certainty, the Council will be overborrowed.
On 25 November 2020 the Chancellor announced the conclusion to the review of margins over gilt yields for PWLB rates; the standard and certainty margins were reduced by 1% but a prohibition was introduced to deny access to PWLB borrowing for any local authority which intended to purchase assets primarily for yield in its three year capital programme. The reduction in future borrowing costs will be factored into the funding of the capital programme which contains no such assets for yield purchases.
While this authority will not be able to avoid borrowing to finance new capital expenditure, to replace maturing debt and the rundown of reserves, there will be a cost of carry, (the difference between higher borrowing costs and lower investment returns), to any new borrowing that causes a temporary increase in cash balances as this position will, most likely, incur a revenue cost.
There is £32m expected to be funded via borrowing in the 2021/22 Capital Programme. No new external borrowing is expected to be undertaken to fund this, and this will be funded through cash balances. This is expected to increase the Council’s under-borrowed position compared to its CFR from £32m at 31 March 2022 to £40m by 31 March 2023.
2.1 Borrowing Strategy for 2022/23
The Council’s Capital Programme 2022/23 to 2024/25 forecasts £258m of capital investment over the next three years with £132m met from existing or new resources. The increase in the Council’s borrowing need over this period is therefore £126m as shown in Table 2 below.
|
2021/22 Projected |
Table 2 |
2022/23 Estimate |
2023/24 Estimate |
2024/25 Estimate |
Total |
|
£m |
£m |
£m |
£m |
£m |
|
|
88 |
Capital Expenditure |
102 |
77 |
79 |
258 |
|
(56) |
Financed by: New & existing resources |
(62) |
(39) |
(31) |
(132) |
|
32 |
Borrowing Need |
40 |
38 |
48 |
126 |
Table 3 below shows the actual expected external borrowing against the capital financing requirement, identifying any under or over borrowing.
|
2021/22 |
Table 3
|
2022/23 Estimate |
2023/24 Estimate |
2024/25 Estimate |
|
Estimate |
||||
|
£m |
£m |
£m |
£m |
|
|
237 |
External Debt at 1 April |
233 |
263 |
292 |
|
(4) |
Expected change in Debt |
30 |
29 |
38 |
|
233 |
External Debt at 31 March |
263 |
292 |
330 |
|
255 |
CFR* at 1 April |
280 |
313 |
342 |
|
32 |
Borrowing need (Table 2) |
40 |
38 |
48 |
|
(7) |
MRP |
(7) |
(7) |
(10) |
|
280 |
CFR* at 31 March |
313 |
344 |
380 |
|
47 |
Under / (Over) borrowing |
50 |
52 |
50 |
*CFR in Table 3 is the underlying need to borrow and excludes PFI and lease arrangements, which are included in the CFR figure in the Prudential Indicators in Annex C
Table 2 demonstrates that the Council has a borrowing need of £126m over the next three years. The strategy will initially focus on meeting this borrowing need from internal borrowing; avoiding external borrowing by utilising the Council’s own surplus funds. Modelling of the movement of reserves and the Council’s capital expenditure plans demonstrates that the Council’s long term reserves can support a level of approximately £50m of internal borrowing. This will mitigate the increase in the cost of borrowing and reduce counterparty risk within the Council’s investment portfolio by reducing the portfolio size.
There will remain a cost of carry (the difference between borrowing costs and investment rates) to any new long term borrowing that causes a temporary increase in cash balances which will, most likely, lead to a cost to revenue.
Therefore, the internal borrowing position needs to be carefully and continually reviewed to avoid incurring higher borrowing costs in the future at a time when the authority may not be able to avoid new borrowing to finance capital expenditure or refinance maturing debt.
2.2 Policy on Borrowing in Advance of Need
The Council will not borrow purely in order to profit from investment of extra sums borrowed. Any decision to borrow in advance will be within approved Capital Financing Requirement estimates and will be considered carefully to ensure that value for money can be demonstrated and that the Council can ensure the security of such funds. Risks associated with any borrowing in advance activity will be subject to prior appraisal and subsequent reporting.
2.3 Debt Rescheduling
Officers continue to regularly review opportunities for debt rescheduling, but there has been a considerable widening of the difference between new borrowing and repayment rates, which has resulted in much fewer opportunities to realise any savings or benefits from rescheduling PWLB debt.
The reasons for any rescheduling to take place will include:
§ the generation of cash savings and / or discounted cash flow savings;
§ helping to fulfil the treasury strategy;
§ enhance the balance of the portfolio (amend the maturity profile and/or the balance of volatility).
The strategy is to continue to seek opportunity to reduce the overall level of Council’s debt where prudent to do so, thus providing in future years cost reduction in terms of lower debt repayments costs, and potential for making savings by running down investment balances to repay debt prematurely as short term rates on investments are likely to be lower than rates paid on current debt. All rescheduling will be agreed by the Chief Finance Officer.
2.4 Interest Rate Risk & Continual Review
The total borrowing need in Table 2, as well as the debt at risk of maturity shown in Table 4 is the extent to which the Council is subject to interest rate risk.
|
Table 4 |
2022/23 |
2023/24 |
2024/25 |
|
|
£m |
£m |
£m |
|
Maturing Debt |
6 |
4 |
5 |
|
Debt Subject to early repayments options |
6 |
6 |
6 |
|
Total debt at risk of maturity |
12 |
10 |
11 |
Officers continue to review the need to borrow taking into consideration the potential increases in borrrowing costs, the need to finance new capital expenditure, refinancing maturing debt, and the cost of carry that might incur a revenue loss between borrowing costs and investment returns.
Against this background and the risks within the economic forecast, caution will be adopted with the 2022/23 treasury operations. The Chief Finance Officer will continue to monitor interest rates in financial markets and adopt a pragmatic approach to changing circumstances:
§ if it was felt that there was a significant risk of a sharp fall in long and short term rates (e.g. due to a marked increase of risks around relapse into recession or of risks of deflation), then long term borrowings will be postponed, and potential rescheduling from fixed rate funding into short term borrowing will be considered.
§ if it was felt that there was a significant risk of a much sharper rise in long and short term rates than that currently forecast, perhaps arising from an acceleration in the start date and in the rate of increase in central rates in the USA and UK, an increase in world economic activity or a sudden increase in inflation risks, then the portfolio position will be re-appraised with the likely action that fixed rate funding will be drawn whilst interest rates are still lower than they will be in the next few years.
3. MINIMUM REVENUE PROVISION POLICY STATEMENT
The Council is required to pay off an element of the accumulated General Fund capital spend each year (the Capital Financing Requirement - CFR) through a revenue charge (the Minimum Revenue Provision - MRP). The Department for Levelling Up, Housing and Communities (DLUHC) regulations require the full Council to approve an MRP Statement in advance of each year. A variety of options are available to Councils, so long as the principle of any option selected ensures a prudent provision to redeem its debt liability over a period which is commensurate with that over which the capital expenditure is estimated to provide benefits (i.e. estimated useful life of the asset being financed).
The policy below reflects a change in the policy as approved and implemented for 2018/19 onwards; The Council is recommended to approve the following MRP Statement for 2022/23 onwards:
For borrowing incurred before 1 April 2008, the MRP policy will be:
· Annuity basis over a maximum of 40 years.
From borrowing incurred after 1 April 2008, the MRP policy will be:
· Asset Life Method (annuity method) – MRP will be based on the estimated life of the assets, in accordance with the proposed regulations. A maximum useful economic life of 50 years for land and 40 years for other assets. This option will also be applied for any expenditure capitalised under a capitalisation directive.
For PFI schemes, leases and closed landfill sites that come onto the Balance Sheet, the MRP policy will be:
· Asset Life Method (annuity method) - The MRP will be calculated according to the flow of benefits from the asset, and where the principal repayments increase over the life of the asset. Any related MRP will be equivalent to the “capital repayment element” of the annual charge payable.
There is the option to charge more than the prudent provision of MRP each year through a Voluntary Revenue Provision (VRP).
For loans to third parties that are being used to fund expenditure that is classed as capital in nature, the policy will be to charge an MRP over the life of the loan.
In view of the variety of different types of capital expenditure incurred by the Council, which is not in all cases capable of being related to an individual asset, asset lives will be assessed on a basis which most reasonably reflects the anticipated period of benefit that arises from the expenditure. Also, whatever type of expenditure is involved, it will be grouped together in a manner which reflects the nature of the main component of expenditure. This approach also allows the Council to defer the introduction of an MRP charge for new capital projects/land purchases until the year after the new asset becomes operational rather than in the year borrowing is required to finance the capital spending.
4. ANNUAL INVESTMENT STRATEGY
The DLUHC and CIPFA have extended the meaning of ‘investments’ to include both financial and non-financial investments. This report deals with financial investments. Non-financial investments are covered in the Capital Strategy.
The Council’s investment policy has regard to the following:
· DLUHC’s Guidance on Local Government Investments (the “Guidance”)
· CIPFA Treasury Management in Public Services Code of Practice and Cross Sectoral Guidance Notes 2017 (the “Code”)
· CIPFA Treasury Management Guidance Notes 2018
The Council’s investment priorities will be the security of capital first, portfolio liquidity second and then yield (return).
4.1 Annual Investment Strategy for 2022/23
Investments will be made with reference to the core balance and cash flow requirements and the outlook for interest rates.
Bank Rate is likely to remain low for a considerable period with moderate increases forecasted over the next 24 months. Link Asset Services (LAS) forecast assumes that investment earnings from money market-related instruments will be below 1.00% for the foreseeable future. LAS’s forecast for Bank Rate (and therefore the rate earned on liquid investments) at each financial year end (i.e. March) are:
|
2021/22 |
2022/23 |
2023/24 |
2024/25 |
|
0.25% |
0.75% |
1.00% |
1.25% |
LAS’s view on the prospect for interest rates, including their forecast for short term investment rates is appended at Annex B.
Following consultation, changes to the strategy were made from 2018/19 to broaden the risk profile by reducing liquidity and to include some suitable, alternative investment products that are held for the medium (2-5 years) to longer term (5 years+). These products can generate better overall returns but there is a higher risk of volatility of performance so a longer term commitment is required.
During 2018/19, £5m was invested in the CCLA Pooled Property Fund which was the first step into utilising the new instruments within the revised strategy. Further investment in property funds was paused during 2020/21 due to a combination of factors. The main consideration, was the uncertain environment of the UK property market coming out of the COVID pandemic. It is therefore not an appropriate time to increase investment balances with property funds.
An options appraisal process was undertaken during 2019/20 to ascertain a) an appropriate level of cash balances that can be invested into longer term instruments and b) which other instruments are most appropriate to expand and diversify the Council’s investment portfolio. This work has been also paused during 2021/22 as a result of the economic impact and market uncertainty that remains as a result of the COVID pandemic.
In 2021/22 two fixed term bank deposits totalling £30m were placed with Standard Chartered that are ringfenced within a sustainable lending ESG framework. These investments are assigned to sustainable assets with the aim of addressing the UN sustainable development goals. The offering fulfils the key principle of security, liquidity and yield and is consistent with the banks current other fixed term deposit rates.
Table 5below summarises the changes since the approved 2017/18 strategy. No further changes are proposed for 2022/23. Each of the new investment products included are described in more detail in Annex E. The inclusion of an investment product category in the strategy does not automatically result in investments being placed – investments will only be placed following a due diligence procedure as described above.
|
Table 5 - Investment options |
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
2022/23 |
|
Money Market Funds (Including LVNAV) |
ü |
ü |
ü |
ü |
ü |
ü |
|
Bank Notice Accounts |
ü |
ü |
ü |
ü |
ü |
ü |
|
Fixed Term Bank Deposits |
ü |
ü |
ü |
ü |
ü |
ü |
|
UK Local Authorities |
ü |
ü |
ü |
ü |
ü |
ü |
|
Enhanced Money Market Funds (VNAV) |
ü |
ü |
ü |
ü |
ü |
ü |
|
Building Societies |
û |
ü |
ü |
ü |
ü |
ü |
|
Pooled Property Funds |
û |
ü |
ü |
ü |
ü |
ü |
|
Corporate Bond Funds (Including Short Dated Bond Funds) |
û |
ü |
ü |
ü |
ü |
ü |
|
Multi Asset Funds |
û |
ü |
ü |
ü |
ü |
ü |
|
Equity Funds |
û |
û |
ü |
ü |
ü |
ü |
The primary principle governing the Council’s investment criteria is the security of its investments, although the return on the investment is also a key consideration. After this main principle, the Council will ensure that:
§ It maintains a policy covering both the categories of investment types it will invest in and the criteria for choosing investment counterparties with adequate security, and monitoring their security;
§ It has sufficient liquidity in its investments;
§ It receives a yield that is aligned with the level of security and liquidity of its investments;
§ Where possible, it actively seeks to support Environmental, Social and Governance (ESG) investment products and institutions that meet all of the above requirements.
The preservation of capital is the Council’s principal and overriding priority.
4.2 Investment Policy – Management of risk
Treasury management risks and how risks are managed and mitigated are identified in the Council’s Treasury Management Practices and related procedures, details of which are held within the Council’s Treasury Management Team. The main risks to the Council’s treasury activities are:
§ liquidity risk (inadequate cash resources);
§ market or interest rate risk (fluctuations in interest rate levels and thereby in the value of investments);
§ inflation risks (exposure to inflation);
§ credit and counterparty risk (security of investments);
§ refinancing risks (impact of debt maturing in future years); and
§ legal and regulatory risk (i.e. non-compliance with statutory and regulatory requirements, risk of fraud).
The guidance from the DLUHC and CIPFA place a high priority on the management of risk. This authority has adopted a prudent approach to managing risk and defines its risk appetite by the following means: -
i) Minimum acceptable credit criteria are applied in order to generate a list of highly creditworthy counterparties. This also enables diversification and thus avoidance of concentration risk. The key ratings used to monitor counterparties are the short term and long-term ratings.
ii) Other information: ratings will not be the sole determinant of the quality of an institution; it is important to continually assess and monitor the financial sector on both a micro and macro basis and in relation to the economic and political environments in which institutions operate. The assessment will also take account of information that reflects the opinion of the markets. To achieve this consideration the Council will engage with its advisors to maintain a monitor on market pricing such as “credit default swaps” and overlay that information on top of the credit ratings.
iii) Other information sources used will include the financial press, share price and other such information pertaining to the banking sector in order to establish the most robust scrutiny process on the suitability of potential investment counterparties.
iv) This authority has defined the list of types of investment instruments that the treasury management team are authorised to use.
a. Specified investments are those with a high level of credit quality and subject to a maturity limit of one year. The limits and permitted instruments for specified investments are listed within Table 7.
b. Non-specified investments are those with less high credit quality, may be for periods in excess of one year, and/or are more complex instruments which require greater consideration by members and officers before being authorised for use. The limits and permitted instruments for non-specified investments are listed within Table 8.
v) Lending limits (amounts and maturity) for each counterparty will be set through applying the credit criteria matrix (within Table 7).
vi) This authority will set a limit for the amount of its investments which are invested for longer than 365 days, detailed in the Treasury Indicators in Annex C.
vii) With the exception of the UK, investments will only be placed with counterparties from countries with a specified minimum sovereign rating of AA+ (see paragraph 4.3).
viii) This authority has engaged external consultants, (see paragraph 5.3), to provide expert advice on how to optimise an appropriate balance of security, liquidity and yield, given the risk appetite of this authority in the context of the expected level of cash balances and need for liquidity throughout the year.
ix) All investments will be denominated in sterling.
x) As a result of the change in accounting standards for 2018/19 under IFRS 9, this authority will consider the implications of investment instruments which could result in an adverse movement in the value of the amount invested and resultant charges at the end of the year to the General Fund. In November 2018, DLUHC, concluded a consultation for a temporary override to allow English local authorities time to adjust their portfolio of all pooled investments by announcing a statutory override to delay implementation of IFRS 9 for five years commencing from 1.4.18.
4.3 Sovereign Credit Ratings
For 2022/23 it is recommended to maintain the policy of lending to sovereign nations and their banks which hold either a AAA or AA+ rating, with the exception of the UK which is currently rated AA- by two of the three rating agencies (Aa2 Moody’s). Maximum investment limits and duration periods will remain the same as in the previous strategy at £60 million and one year respectively. The list of countries that qualify using this credit criteria (as at the date of this report) are shown below:
AAA Australia, Denmark, Germany, Netherlands, Singapore, Sweden and Switzerland
AA+ Canada
AA- UK
4.4 Creditworthiness Policy
The Council applies thecreditworthiness service provided by the Link Group. This service employs a sophisticated modelling approach utilising credit ratings from the three main credit rating agencies which is then supplemented with the following overlays:
· credit watches and credit outlooks from credit rating agencies;
· credit default swap (CDS) spreads to give early warning of likely changes in credit ratings;
· sovereign ratings to select counterparties from only the most creditworthy countries.
This weighted scoring system then produces an end product of a series of colour coded bands which indicate the relative creditworthiness of counterparties. These colour codes are used by the Council to determine the suggested duration for investments.
The Council (in addition to other due diligence consideration) will use counterparties within the following durational bands provided they have a minimum AA+ soverign rating from three rating agencies:
|
Y |
P |
B |
O |
R |
G |
N/C |
|
|
|
|
|
|
|
|
|
Up to 5yrs |
Up to 2yrs |
Up to 1yr |
Up to 1yrs |
Up to 6 months |
Up to 100 days |
Not to be used |
Typically the minimum credit ratings criteria the Council use will be a Short Term rating (Fitch or equivalents) of F1 and a Long Term rating of A-. There may be occasions when the counterparty ratings from one rating agency are marginally lower than these ratings but may still be used. In these instances consideration will be given to the whole range of ratings available, or other topical market information, to support their use.
The primary principle governing the Council’s investment criteria is the security of its investments, although the return on the investment is also a key consideration. After this main principle, the Council will ensure that:
§ It maintains a policy covering both the categories of investment types it will invest in and the criteria for choosing investment counterparties with adequate security, and monitoring their security;
§ It has sufficient liquidity in its investments.
All credit ratings are monitored daily. The Council is alerted to changes to ratings of all three agencies through its use of the LAS credit worthiness service. If a downgrade results in the counterparty or investment scheme no longer meeting the Council’s minimum criteria, its further use as a new investment will be withdrawn immediately.
In addition to the use of credit ratings, the Council is advised of information re movements in Credit Default Swap against the iTraxx benchmark and other market data on a weekly basis. Extreme market movements may result in downgrade of an institution or removal from the Council’s lending list. The counterparties in which the Council will invest its cash surpluses is based on officer’s assessment of investment security, risk factors, market intelligence, a diverse but manageable portfolio and their participation in the local authority market.
Table 7 below summarises the types of specified investment counterparties available to the Council, and the maximum amount and maturity periods placed on each of these. A full list of the Council’s counterparties and the current limits for 2021/22 are appended at Annex A.
Criteria for Specified Investments
|
Table 7 |
Country/ Domicile |
Instrument |
Min. Credit Criteria/LAS colour band |
Max. Amount |
Max. maturity period |
|
Debt Management and Deposit Facilities (DMADF) |
UK |
Term Deposits (TDs) |
N/A |
unlimited |
12 Months |
|
Government Treasury bills |
UK |
TDs |
UK Sovereign Rating |
unlimited |
12 Months |
|
UK Local Authorities** |
UK |
TDs |
UK Sovereign Rating |
£60m |
12 Months |
|
Banks – part nationalised |
UK |
§ TDs § Deposits on Notice § Certificates of Deposit (CDs) |
N/A |
£60m |
12 Months |
|
Banks |
UK |
§ TDs § Deposits on Notice § CDs |
Blue |
£60m |
12 Months |
|
Orange |
£60m |
12 Months |
|||
|
Red |
£60m |
6 Months |
|||
|
Green |
£60m |
100 Days |
|||
|
Building Societies |
UK |
§ TDs § Deposits on Notice § CDs |
Blue |
£60m |
12 Months |
|
Orange |
£60m |
12 Months |
|||
|
Red |
£60m |
6 Months |
|||
|
Green |
£60m |
100 Days |
|||
|
Individual Money Market Funds (MMF) CNAV and LVNAV |
UK/Ireland/ EU domiciled |
AAA Rated Money Market Fund Rating |
N/A |
£60m |
Liqiuid |
|
VNAV MMF’s and Ultra Short Dated Bond Funds |
UK/Ireland/EU domiciled
|
AAA Rated Bond Fund Fund Rating |
N/A |
£60m |
Liquid |
|
Banks – Non-UK |
Those with sovereign rating of at least AA+* |
§ TDs § Deposits on Notice § CDs |
Blue |
£60m |
12 Months |
|
Orange |
£60m |
12 Months |
|||
|
Red |
£60m |
6 Months |
|||
|
Green |
£60m |
100 Days |
*See Paragraph 4.3 for full list of countries that meet these criteria
** Local Authorities appear on both Specified and Non-specified investment list – an investment with a LA for up to a year is Specified, and between 1-2 years is Non-specified. The maximum amount that can be lent to any single Local Authority is £60m across both specified and Unspecified Investments
Non-Specified investments are any other types of investment that are not defined as specified. The identification and rationale supporting the selection of these other investments and the maximum limits to be applied are set out in Table 8 below:
|
Table 8 |
Minimum credit criteria |
Maximum investments |
Period |
|
UK Local Authorities** |
Government Backed |
£60m |
2 years |
|
Corporate Bond Fund(s) |
Investment Grade |
£30m |
2 - 5 years |
|
Pooled Property Fund(s) |
N/A |
£30m |
5+ years |
|
Mixed Asset Fund(s) |
N/A |
£30m |
2 - 5 years |
|
Short Dated Bond Fund(s) |
N/A |
£30m |
2 – 5 years |
** Local Authorities appear on both Specified and Non-specified investment list – an investment with a LA for up to a year is Specified, and between 1-2 years is Non-specified. The maximum amount that can be lent to any single Local Authority is £60m across both specified and Unspecified Investments
The maximum amount that can be invested will be monitored in relation to the Council’s surplus monies and the level of reserves. The approved counterparty list will be maintained by referring to an up-to-date credit rating agency reports, and the Council will liaise regularly with brokers for updates. Where Externally Managed Funds are not rated, a selection process will evaluate relative risks & returns. Security of the council’s money and fund volatility will be key measures of suitability. Counterparties may be added to or removed from the list only with the approval of the Chief Finance Officer. A full list of the Council’s counterparties and the current limits for 2022/23 are appended at Annex A.
5. OTHER TREASURY ISSUES
5.1 Banking Services
NatWest, which is part Government owned, currently provides banking services for the Council.
5.2 Training
The CIPFA Code requires the responsible officer to ensure that members with responsibility for treasury management receive adequate training in treasury management. This especially applies to members responsible for scrutiny. Training was last provided to Audit Committee members on 19 November 2021 and further training will be arranged as required.
The training needs of treasury management officers are periodically reviewed and training arranged as required.
5.3 Policy on the use of External Service Providers
The Council uses Link Asset Services as its external treasury management advisors.
The Council recognises that responsibility for treasury management decisions remains with the Council at all times and will ensure that undue reliance is not placed upon our external service providers. It also recognises that there is value in employing external providers of treasury management services in order to acquire access to specialist skills and resources. The Council will ensure that the terms of their appointment and the methods by which their value will be assessed are properly agreed, documented and subject to regular review.
5.4 Lending to Third Parties
The Council has the power to lend monies to third parties subject to a number of criteria. These are not treasury type investments rather they are policy investments. Any activity will only take place after relevant due diligence has been undertaken.
5.5 Updates to Accounting Requirements
§ IFRS9 – local authority override – English local authorities
The DLUHC enacted a statutory over-ride from 1 April 2018 for a five year period until 31 March 2023 following the introduction of IFRS 9 and the requirement for any capital gains or losses on marketable funds to be chargeable in year. This has the effect of allowing any capital losses on funds to be held on the balance sheet until 31 March 2023, allowing councils to initiate an orderly withdrawal of funds if required.
§ IFRS 16 – Leasing
The CIPFA Code of Practice will incorporate the requirement to account for all leases onto the council’s balance sheet. There have been indications that the implementation date for this is going to be set back to 2022/23 due to pressures on staff from the COVID Pandemic.
Once implemented, this has the following impact to the Treasury Management Strategy:
· The MRP Policy sets out how MRP will be applied for leases bought onto the balance sheet;
· The Council’s Capital Financing Requirement authorised limit and operational boundary for 2022/23 onwards has been increased to reflect the estimated effect of this change. These limits can be amended during 2022/23 if required and bought to full Council to amend with the TMSS Mid Year report if the limits need to be increased following some more detailed work on the leases to be bought onto the balance sheet.
