Agenda item

Mid Year Treasury Report


The Senior Accountant, Treasury and Fixed Assets, introduced the Mid-Year Treasury Report, summarising as follows:  


The report is based on a template provided by Arlingclose, the Authority’s Treasury Management advisors and is compiled specific to Monmouthshire County Council.

The Authority aims to comply with the CIPFA Treasury Management Code which requires the Authority to approve treasury management semi-annual and annual reports and to have regard to the security & liquidity of its investments before seeking additional returns.


The Prudential Code requires the Authority to have a Capital Strategy approved by full Council, laying out how to best meet the wide range of objectives the Authority has with limited capital resources. This was approved by Council on the 19th September 2019 and will be updated annually.


The Treasury Management Code now covers non-treasury investments as well as treasury investments requiring Authorities to show how they provide due diligence in the same way as it does for Treasury investments. The Authority has not increased its holding of non-treasury investments in the first half of 2019/20 but is still looking to spend the full balance of the approved £50m by the end of 2020/21.


There has been economic uncertainty in the first 6 months of 2019/20 with another 6 months likely due to the extension of the Brexit deadline and a deepening slowdown in Europe. Politics abroad has also continued to be a big driver of financial markets for example with continuing tensions between the US and China. The Bank of England maintained rates at 0.75% to support the economy.


Gilt interest rates fell partly due to this uncertainty so the Authority took out £7m of long term borrowing to lock in some longer term benefit from these low rates, a good decision with hindsight as PWLB rates rose by 1% in October 2019.


At 31st March 2019 the Authority had a borrowing Capital Financing Requirement of £183.9m and gross external borrowing of £178.3m. Gross borrowing increased marginally up to £180.1m in the 6 months to the 30th September but net borrowing fell from £158.0 m to £148.9m due to a short term increase in investments.


The Authority continues to hold a minimum of £10m of investments to meet the requirements of a professional client under the Mifid II regulations (Markets in financial instruments directive).  The investment in strategic pooled funds has now been increased from £2m to £3m. These funds have returned income of £63,000 in the first 6 months of the year. Capital losses of £45,000 including a one off £39,000 will be absorbed by the surplus held in the Financial Instruments revaluation reserve.

The Authority is forecasting a saving of £243,000 for 2019/20 in the areas of interest payable and interest receivable against a total net budget of £4.0m.


Questions and comments were invited, and answered as follows:


Audit Committee understood that future long term borrowing from the Public Works Loans Board (PWLB) will be more expensive.  It was considered that the current level of borrowing is sustainable.  A Member sought clarification on borrowing for specific projects, and it was confirmed that the authority doesn’t borrow for specific projects but instead to sustain cash levels in order to allow the Authority to make any payments required.  When analysing the profitability of recent large property investments, the borrowing rates available at the time are taken into account, and the cost of the borrowing which would be required if the project were carried out in isolation built into the profit forecast for the life of the project. It was added that the treasury team evaluate the amount and timing of borrowing required for the Authority as a whole to maintain cash flow, and then identify the most appropriate method of obtaining funding taking into account any opportunity for internal borrowing e.g. due to capital receipts, in order to minimise borrowing costs.


In response to a question, it was confirmed that the rate of interest on most of the Authority’s PWLB loans was fixed on the day for the duration of the loan. Historically the Authority has only taken on one variable rate loan, and this has proved beneficial due to the rates offered by the PWLB at that time.


A Member asked, regarding the Solar Farm investment, if it is devalued over the twenty-year term and it was confirmed that the Estates Team value all assets annually.  The Solar Farm is predicted to maintain its value which is based on its potential for income generation.  With regard to commercial assets, consideration is given to how long the asset will last for and there is a principle to not to take out loan funding for longer than the expected life of the asset.


A Member referred to external influences, particularly the tensions between the USA and China, and asked how the evolution of the global economy will affect investment.  It was agreed that these are difficult and unpredictable times and that the Authority relies on forecasts and advice from its Treasury Advisers. 


In response to a question, it was confirmed that there have been many changes to the regulation of banks, since the collapse of the Icelandic Banks, to mitigate future problems, that banks have to comply with. Additionally, diversification in investments is key in spreading the risk.  The Committee’s role in scrutinising the treasury strategy is key in assessing risk factors.


A Member asked if the authority specifies a triple A rating, and questioned if the UK Government was downgraded, would assets be moved around.  It was explained that a central factor in reducing risk is to ensure that counter parties are rated A minus or above adding that Arlingclose provide additional advice on counterparty strength which is closely followed.


A Member sought clarification regarding capital losses of £45,000 due to bid offer spread and commented that the loss would not crystallise until sold and suggested that the statement could be open to misinterpretation. This point was agreed with.  It was explained that there is investment in two pooled funds that can be bought and sold at the same rate on any day.  £500,000 has been invested in a property fund which has a bid/offer spread of 8%, resulting in a one off loss on this investment to date.  The intention is to keep all these funds for a minimum of 3-5 years to minimise any net capital gains and losses and to collect the steady income returns.


Referring to the report recommendations, the Committee reviewed the treasury management activities in the first half of 2019/20 as contained in the report and considered if any changes to the process should be considered for incorporation into the 2020/21 Treasury Management Strategy Statement.

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