That Cornwall £3M Loan
Guest Author NORMAN MURPHY has been doing some homework on the subject of that £3 million short-term loan to Cornwall (Unitary) Council – and thereby spins a speculative tale of runaway debt, with a very disturbing sting in its tail.
The original administrative body which governed the county of Cornwall was formed on 1 April 1889 and was known as Cornwall Council. The Council had its headquarters at Old County Hall in Station Road, Truro until it moved to New County Hall at Treyew Road, also in Truro, in 1966. In 1974 following local government reorganisation the six districts which made up the County: Caradon, Carrick, Kerrier, North Cornwall, Penwith Districts and Restormel (a Borough) were amalgamated and became the constituent parts of the newly formed Cornwall County Council (CCC).
It seems that from 1974 until the early 1990s, CCC conducted its financial affairs in a fairly normal and unremarkable way. The Council spent within its means and carried very little debt.
The Eden Project
However, in 1994 the Eden Project was conceived by Tim Smit, who had also been responsible for recovering the famous Lost Gardens of Heligan. Smit had spotted a former china clay pit; a huge crater, 60 metres deep, south facing and sheltered, but with no soil and prone to flooding 4 miles to the east of St. Austell in Cornwall. Smits’ idea was to visually tell the story of man’s dependence on plants by creating huge biome structures which would be the biggest conservatories in the world, split into a ‘humid tropics biome’ and a ‘warm temperate Mediterranean biome’.
In October 1998, building work got under way but was halted in December after weeks of incessant rain. The project restarted in 1999, but a new problem soon arose when it was discovered that a new three-mile access road would be needed to bypass a local village. Smit now, it seems, in financial difficulty and with nowhere else to go, approached CCC and they agreed to give him a £3M loan of which £1.8M was for the access road.
With this loan the access road was built and the Eden Project was finally opened to the public on 17th March 2001. However, financial problems continued to overshadow the Eden Project and CCC, who were obviously keen to see the project succeed, were forced to subsidise the project to ensure its continued existence.
The Eden Project
Nonetheless, despite its financial problems, by the summer of 2002 it had become clear that the Eden Project was a success in terms of attracting visitors to Cornwall. However, it also soon became clear that if the success of the project was to continue CCC, would have to continue to support it financially for quite some time.
Whether the additional costs incurred by CCC in supporting the Eden Project were the only reason CCC needed additional funds in late 2002, or whether there were other funding commitments which needed addressing, is uncertain. But what is certain is that in late 2002 CCC wanted to borrow some money.
21st Century Borrowing
To facilitate its needs CCC turned to a new form of Council borrowing – a financial vehicle called a LOBO which stands for Lender Option Borrower Option.
A LOBO loan is typically a very long-term loan – for example 40 to 70 years. The interest rate is initially fixed, but the lender has the “option” to propose or impose, on pre-determined future dates, such as every 5 years, a new fixed rate. The borrower has the ”option” to either accept the new rate or repay the entire loan’.
If the local authority chooses to repay the loan early (for example to access a cheaper rate loan elsewhere) it would need to pay a “break penalty” to exit the loan, which given the pricing of derivatives in the contracts, can cost multiples of the original loan principal.
The starting interest rate of a LOBO loan is usually quite low, designed to undercut PWLB (Public Works Loan Board) loan rates, and is known as a “teaser rate”. Due to the complexity and “optionality” of the contracts, the overall interest rate of the loan is difficult to price over the long term, without sophisticated pricing tools that the majority of Local Authorities will not have direct access to.
As ex-Barclays Capital employee Rob Carver reflects:
“You just need a Bermudan swaption pricer to know the relevant volatility surface, some kind of interest rate model calibrated to the appropriate processes and the full forward and spot curve.”- not the things the average Mr Perkins in a Council finance department has to hand.”
Unfortunately for CCC, as there is no specific regulatory oversight of Council Lobo loans, CCC was replacing safe fixed rate 50-year loans from Central Government with a new variable rate LOBO loan that could end in 5 years time and need to be repaid in full.
Nevertheless, despite the obvious dangers of taking on a LOBO, CCC needed the money and on 23/01/2003 agreed to a 13 million pound LOBO loan provided by the Irish bank KBC. Note the Irish connection. (Also full list of Cornwall Council loans 2015/16 at Debt Resistance NoLOBOs)
Over the next three years the Eden Project continued to expand and CCC continued to borrow money via LOBOs. By 2006 CCC were in debt to various LOBO banks to the tune of over £1.2 billion. However, although they had huge debts CCCs cabinet decided, in 2006, to “freeze interest payments (on the Eden Project loans) in order to facilitate the further development of the Eden Project”.
Consolidating the Burden of Debt
By mid-2006, there is no doubt that CCC were in serious debt, however, in October 2006 the Department of Communities and Local Government (DCLG), of all people, came to their rescue by publishing The Local Government White Paper ‘Strong and Prosperous Communities’, which, amongst other things, offered Councils in two tier areas (where there were separate County and District/Borough Councils – as was the case at CCC), the opportunity to submit proposals to reorganise the local arrangements of governance and set up a new Unitary Council.
No doubt seeing a way to rearrange its finances, CCC quickly submitted a proposal for a single Unitary Council for Cornwall which, in July 2007, was approved by the government.
Meanwhile, the financial position of the Eden Project had not improved very much and, as Smit could not repay the remaining £1.8M of the original loan, it had to be “repaid by the South West Regional Development Agency, and the accumulated interest of £164K was written off”.
The new Council, Cornwall (UNITARY) Council (CUC), came into being on 1st April 2009 and the first elections were held on 4 June 2009. CUC is currently the biggest employer in Cornwall, it provides a wide range of services to more than half a million residents and is responsible for spending a budget of more than £1 billion every year.
Nonetheless, and despite its new status, CUC continued to run up debt and, by 2018, was up to its eyes in it. Richard Whitehouse, for Cornwall Live, reported in June 2018 that total CUC debt was now £723 million. To service the repayments on its debts CUC took out further LOBOs but the repayments were getting out of hand and eventually its external auditors, Grant Thornton, had to act.
Geraldine Daly to the Rescue
Now it should be noted at this point that the individual who acted for Grant Thornton, CUCs external auditors, is a woman called Geraldine Daly: Grant Thornton UK LLP, Appointed Auditor, Cornwall Council, 2 Glass Wharf, Bristol BS2 0EL.
After auditing the Councils books in 2018/2019, Geraldine Daly was forced to send a letter to the Council’s Audit Committee informing them that they were in financial trouble. Consequently, the Council decided that two of the inverse LOBO loans it had worth £85M (with the Royal Bank of Scotland) should be repaid early due to the high cost of the borrowing.
However, as CUC had no money to repay the loans, they had to borrow the money (January 2019) from the Public Works Loan Board (PWLB). [Taken from an article by Richard Whitehouse, Local Democracy Reporter Cornwall Live 27 Jan 2020].
But that was not the end of the borrowing, because the loans were LOBO loans the Council was forced to pay a £45 million penalty. The auditor, Geraldine Daly, found that there had been “serious failings” around the use of these controversial loans and “issued a series of recommendations for the Council in their annual audit letter”.
However, the audit letter from Grant Thornton, Geraldine Daly, explained that the “serious failings” were the fault of “the authorities which preceded Cornwall Council”, which, as will be remembered, was re-formed as a Unitary Council only in 2009.
Geraldine Daly went on to say that “we, Grant Thornton, will be closely monitoring the Council’s current Investment Strategy and we believe it critical that the Council exercises much stronger governance arrangements than its predecessors.”
In a more detailed report on the LOBO issue, the audit letter states:
“The premium paid to come out of these loan arrangements was £45,233,438. This premium was paid to compensate the lender for the future interest that they will no longer receive. The size of the premium is a clear reflection of the high interest rates which were being paid on these loans.”
What Geraldine Daly does not say, however, is why as Grant Thornton and herself, who had been CUC’s auditors for many years, had not picked up on the high (and dangerous) cost of LOBO loans much earlier.
Nor does she mention that, in 2018, Grant Thornton UK LLP, was fined £4M for audit misconduct after a former partner joined the audit committees of two organisations while Grant Thornton UK LLP was still auditing them.
Nor does she mention that, early in 2019, Grant Thornton lost the audit of Patisserie Valerie after it failed to spot a £20M accounting black hole in its books, thereby triggering an investigation by the Financial Reporting Council.
Nor does she mention that, in September 2019, Grant Thornton (along with other defendants) entered into a settlement agreement with VEREIT stockholders to settle pending class action litigation against Grant Thornton regarding, among other things, alleged violations of Section 11 of the 1933 Act (In re American Realty Capital Properties, Inc. Litigation and the remaining opt-out actions), at a cost to Grant Thornton of $49M.
Nor does she mention that Cornwall Unitary Council is currently servicing nearly 30 long term Lender Option Borrower Option loans (LOBOs) totalling £394M. The Council is locked into some of the deals until the year 2078, paying interest at more than double the current market rate.
Now, you may ask, how does Geraldine Daly, who works for Grant Thornton, the auditors who audit the accounts for CUC, connect to Scarborough Borough Council (SBC), who use Mazars to audit their books.
Well we know that Geraldine Daly, who is the external auditor for CUC, works for Grant Thornton a firm with previous form for audit misconduct. We also know that CUC has a huge amount of debt identified, suspiciously late in the day it might be noted, by Geraldine Daly.
So how, I hear you ask, do these facts about Geraldine Daly, auditors Grant Thornton and the knowledge that CUC are in debt add up to an SBC connection?
Well, interestingly, as we know, CUC, a Council in deep debt, has recently briefly added to that debt by borrowing £3M from little SBC. We also know, interestingly, that SBC’s external auditors are a firm called Mazars, who also interestingly have been unable to sign off SBC’s accounts as complete and satisfactory for several years.
Now, although this might just be coincidence, who do you think works for Mazars on Scarborough’s books? None other than a guy called Pádraig Daly.
Geraldine (left) and Pádraig Daly (right)
Could it be that the very Irish-sounding (remember, the original LOBO loan provider was an Irish bank) Geraldine and Pádraig are in some way connected, perhaps even husband and wife? And could it also be, therefore, that Geraldine told Pádraig that CUC needed money and Pádraig told Geraldine that SBC could lend them some; £3 million to be precise?
Well, it’s a thought – and something that I, if I were Chair of either SBC’s Audit Committee or its Overview & Scrutiny Board, would want to have either confirmed or comprehensively rebutted. Indeed, the connection, if there is one, could, I am sure, be clarified in short order by SBC’s very own Director of Finance, Mr Nick Edwards. However, I know this is very unlikely, as we all know, it is more than likely we will see a unicorn before we see any truthful information revealed by an SBC Officer.
So, I suspect that the matter of how SBC came to lend £3M to CUC will never be put to members of either of those SBC Committees – and that members will remain, like the proverbial mushrooms, kept in the dark and, as usual, fed on crap.
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