Presented by

Value for Money Scrutiny Committee -

Treasury Management Strategy &

Annual Investment Strategy 2013/14

Chris Scott, Director

Lincolnshire County Council - 26th February

2013

Member Briefing Treasury Management

Structure of the

Presentation

Lincolnshire County Council

1. Market Update

2. Investment Strategy

3. Debt Management

4. Questions

2

Member Briefing Treasury Management

Market Update

3

Lincolnshire County Council

Member Briefing Treasury Management

U.K. Bank Rate Forecast

4

Lincolnshire County Council

Sector's Interest Rate View

M ar-13 Jun-13 Sep-13 Dec-13 M ar-14 Jun-14 Sep-14 Dec-14 M ar-15 Jun-15 Sep-15 Dec-15 M ar-16

Sector's Bank Rate View 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75%

3 m onth LIBID 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.60% 0.60% 0.70% 0.80% 1.10% 1.40% 1.70%

6 m onth LIBID 0.70% 0.70% 0.70% 0.70% 0.70% 0.70% 0.80% 0.90% 1.00% 1.10% 1.30% 1.60% 1.90%

12 m onth LIBID 1.00% 1.00% 1.00% 1.00% 1.00% 1.10% 1.10% 1.20% 1.30% 1.30% 1.50% 1.80% 2.10%

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

(%)

LIBID Rate Forecast

3m LIBID 6m LIBID 12m LIBID 3m LIBID Forecast 6m LIBID Forecast 12m LIBID Forecast

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

(%)

Bank Rate Forecast

Bank Rate Sector Forecast CE Forecast UBS Forecast

Member Briefing Treasury Management

Credit – Countries’ Banks CDS

5

Lincolnshire County Council

50

75

100

125

150

175

200

225

250

275

300

325

350

Sp

read

(b

ps)

Average Countries' Bank CDS Spread

Average Australian Banks CDS Spread Average Swedish Banks CDS Spread Average German Banks CDS Spread Average UK Banks CDS Spread

Australian banks included in average (Australia and New Zealand Banking Group Ltd, Commonwealth Bank of Australia, National Australia Bank Ltd Westpac Banking Cor poration, Macquarie Bank Limited)Swedish Banks included in average (Nordea Bank AB, Skandinaviska Enskilda Banken AB, Svenska Handelsbanken AB, Swedbank AB) German banks included in average (UniCredit Bank AG, Deutsche Bank AG, Landesbank Baden Wuerttemberg, Commerzbank AG, Deutsche Postbank AG)UK banks included in average (Santander UK, Barclays Bank plc, HSBC Bank plc, Standard Chartered Bank, Lloyds TSB Bank Plc, The Royal Bank of Scotland Plc)

U.K Banks

Australian Banks

German Banks

Swedish Banks

Member Briefing Treasury Management

Credit – UK Bank’s 5 year Senior Debt CDS Spreads

6

Lincolnshire County Council

0

50

100

150

200

250

300

350

400

450

CD

S S

pre

ad

Date

UK Bank's 5 year Senior Debt Credit Default Swap Spreads

U.K Santander UK Barclays Bank plc HSBC Bank plc Standard Chartered Bank Lloyds TSB Bank Plc The Royal Bank of Scotland Plc

Member Briefing Treasury Management

Investment Strategy

7

Lincolnshire County Council

Member Briefing Treasury Management

Investment Conditions

8

Lincolnshire County Council

To summarise

• Rates to stay low and continue to be impacted upon by the Funding for Lending Scheme

• Although market conditions have improved there is still sufficient uncertainty to merit a bias towards shorter term investments

• 3 month Sector cap on investments recently removed

• Real potential for the UK to lose AAA sovereign status

• A cautious approach should continue to be maintained

Member Briefing Treasury Management

Investment Strategy 2013/14

9

Lincolnshire County Council

• Portfolio expected to average £100m-£150m

• Minimum AA- long term rating, except part nationalised

• Minimum AAA sovereign rating (exclude UK?)

• Specified Investments (up to 1 year, highly rated, low risk)

• Non-specified Investments – limits set but unlikely to be used

• Comparison with other Local Authorities in benchmarking group(1.10% v 1.16%) as at 31st December 2012

• More cautious parameters than Sector guidelines

Member Briefing Treasury Management

Debt Management

Strategy

10

Lincolnshire County Council

Member Briefing Treasury Management

11 11

U.K. Interest Rate Forecasts

Lincolnshire County Council

Bank Rate

NOW Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16

Sector's View 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75%

UBS 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% - - - - -

Capital Economics 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% - - - - -

5yr PWLB Rate

NOW Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16

Sector's View 1.87% 1.50% 1.50% 1.60% 1.60% 1.70% 1.70% 1.80% 2.00% 2.20% 2.30% 2.50% 2.70% 2.90%

UBS 1.87% - - - - - - - - - - - - -

Capital Economics 1.87% 1.55% 1.30% 1.30% 1.30% 1.30% 1.30% 1.50% 1.60% - - - - -

10yr PWLB Rate

NOW Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16

Sector's View 3.04% 2.50% 2.50% 2.60% 2.60% 2.70% 2.70% 2.80% 3.00% 3.20% 3.30% 3.50% 3.70% 3.90%

UBS 3.04% 3.00% 3.10% 3.20% 3.40% 3.50% 3.60% 3.70% 3.80% - - - - -

Capital Economics 3.04% 2.55% 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% - - - - -

25yr PWLB Rate

NOW Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16

Sector's View 4.19% 3.80% 3.80% 3.80% 3.80% 3.90% 3.90% 4.00% 4.10% 4.30% 4.40% 4.60% 4.80% 5.00%

UBS 4.19% 4.20% 4.30% 4.40% 4.50% 4.50% 4.50% 4.50% 4.50% - - - - -

Capital Economics 4.19% 3.70% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% - - - - -

50yr PWLB Rate

NOW Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16

Sector's View 4.33% 4.00% 4.00% 4.00% 4.00% 4.10% 4.10% 4.20% 4.30% 4.50% 4.60% 4.80% 5.00% 5.20%

UBS 4.33% 4.30% 4.40% 4.50% 4.60% 4.60% 4.60% 4.60% 4.60% - - - - -

Capital Economics 4.33% 4.00% 3.80% 3.80% 3.80% 3.80% 3.80% 3.80% 3.80% - - - - -

Member Briefing Treasury Management

Debt Portfolio Position

12

Lincolnshire County Council

• CFR at 31/3/2013 forecast = £561m

• External debt at 31/1/2013 = £456m

• Borrowed from PWLB (£446m) and Banks (£10m)

• Average rate 4.14% all fixed rate

• Low compared to most Councils

• Therefore potential borrowing requirement of £100m at 31/3/2013 currently internally funded

• CFR rises by a further £117m by the end of 2015/16

Member Briefing Treasury Management

Debt Maturity Profile

13

Lincolnshire County Council

£0

£5,000,000

£10,000,000

£15,000,000

£20,000,000

£25,000,000

£30,000,000

£35,000,000

£40,000,000

VA

LUE

OF

PRIN

CIPA

L

FINANCIAL YEAR

PWLB - maturity PWLB - annuity PWLB - EIP PWLB - variable Market

Member Briefing Treasury Management

Debt Management Strategy

14

Lincolnshire County Council

• Continuing to fund internally is sensible in the expected interest rate and counterparty environment but a balance needs to be struck

• Medium / longer term rates need to be monitored. Sector set trigger rates for activity

• Flexibility to change if required

• £12m borrowed December 2012. Respective rates have risen by 0.5% since, although expected to fall back

• Use of other non PWLB options allows full range of options to be considered

• Overall the strategy is in line with our suggestions and allows sufficient flexibility

Member Briefing Treasury Management

15

Lincolnshire County Council

Member Briefing Treasury Management

Questions

16

Lincolnshire County Council