To consider the report of the Executive Head of Finance

The Committee considered a report which summarised the Council’s Treasury Management operations for the first six months of the financial year. 

The Council had, by Minute 165(b)/10, approved the treasury management prudential indicators for 2010/11.   Details of the treasury management activities in the first six months were reported.  It was noted that these had been within the limits set by the prudential indicators.  At 30 September 2010, the Council’s external debt totalled £64.9m with an average annual interest rate of 5.01%.  No new long term borrowing had been undertaken during this period.  However, it was thought that further external borrowing could be required from March 2011 as available internal resources fell and opportunities for internal borrowing reduced.  This was due to work progressing on building the new Stanley Park High School and using the government grant.  As part of the Comprehensive Spending Review all Public Works Loan Board rates had been increased by 1%.  This had made that borrowing less competitive against other commercial loans.  The Council’s treasury advisers – Sector, had indicated that Lender Option Borrower Option loans were currently the cheapest option available to the Council and a bid had recently been placed for a loan totalling £10m, the outcome of which was awaited.  No temporary loans had been entered into during the first six months of the year. 

Details of investment balances during the first six months of the year were also reported.  The average investment amount available had been £53.2m and the interest received totalled £296k.  This represented an average interest rate of 1.19% which compared favourably with the seven day London Interbank Bid Rate of 0.42%. 

The Council was due to consider a new treasury management and annual investment strategy for 2011/12.  Proposals to change to the new strategy were considered by the Committee.  Mr David Whelan, Managing Director of Sector, gave a presentation which outlined how that company calculated the creditworthiness of individual counterparties.  Sector used a weighted scoring system which assessed the following factors for each institution:

·                    Credit Ratings from each of the three main rating agencies (FITCH, Moody’s and Standard and Poors)

·                    The outlook for a particular institution (negative or positive outlook)

·                    An institution’s Credit Default Swap (CDS) spread as an early indicator of potential risk

·                    The Sovereign credit rating of the country in which the institution is domiciled

·                    Guarantees given by the UK Government for specific institutions

The assessment of all the factors listed above produced a mathematically calculated risk weighted score to indicate an institution’s relative creditworthiness.

When devising the current strategy the Council had taken the decision to supplement Sector’s model with a set of minimum credit ratings from each of the three credit ratings agencies when selecting counterparties it could invest with from the Council’s agreed list.  This procedure followed recommendations contained within the new Treasury Management code. However, this approach was incompatible with Sector’s methodology which did not apply minimum credit ratings but instead used the range of different indicators shown above to assess an institution’s financial  ...  view the full minutes text for item 1004