LOBO SCAM

Kent County Council has 25 Lender Option, Borrower Option (LOBO) Loans on its books, worth £442 million, signed between 2005 and 2011, with Barclays, RBS, Dexia and Depfa.

Butlers (an ICAP subsidiary) was the Treasury Management Advisor (TMA) to Kent  in all cases, whilst parent company and broker ICAP, actioned 23 out of 35 LOBO loan transactions, with Tullet Prebon, with RP Martins responsible for one LOBO loan trade each.

Brokerage fees on the 25 LOBO loans are greater than £1 million, with approximately £950,000 going straight into the pockets of ICAP/ Butlers in the form of kickback payments.

Independent financial analysis of Kent County Councils LOBO loan portfolio, and resulting financial position by financial analyst Nicholas Dunbar and Gary Kendall established that Barclays, RBS and Dexia recorded an upfront trading profit on day one of £23 million from the embedded derivatives in the Kent LOBOs.

To exit the LOBO loan contracts (as at October 2014) would cost Kent County Council £716 million, and the difference between this figure, and the value of the LOBO loans as represented in Kent’s annual accounts £200.7 million is greater than the entire Kent adult social care budget.

As of the 1St April 2016 the figure to exit would be closer to £800 million.

The issues for Kent are two-fold.

Firstly, because of profit motive associated with Butlers receiving commission payments from ICAP, analysis shows that the so called “independent” advice offered by Butlers to borrow via LOBO loans was neither in the council’s best interests, nor was it independent.

Evidence presented by Abhishek Sachdev – CEO Vedanta Hedging to the Communities and Local Government Inquiry into LOBO loans founds found that where Butlers were the advisor, ICAP brokered the resulting LOBO trades in 77% of cases, despite CIPFA requirements for councils to maintain a panel of at least three brokers to ensure “best price execution.”

Secondly, due to the fall in base interest rates since 2008/09 and the drop in London Interbank Offered Rate (or LIBOR) upon which the LOBO loans are priced, Kent County Council is now effectively locked into the contracts, and subject to a hefty exit penalty or “breakage fee” to exit the deals.

With base interest rates and LIBOR expected to remain at record lows to at least the end of the decade, Kent is effectively locked into paying higher interest for the next 60 years, when if council could break these contracts, it could refinance via the Public Works Loan Board at significantly lower rates of interest, achieving significant savings for Kent taxpayers and protecting local taxpayers.

We request that Kent County Council examines whether LOBO loans were potentially mis-sold by Butlers, and explores avenues for legal appeal.

Shepwayvox