KCC’s £50m Debt Repayment Misses the Real Target: £90m LOBO Loans

Kent County Council’s Reform UK administration has celebrated wiping £50 million off the council’s long-term debt. It sounds bold. It photographs well. But judged against the liabilities that do the most damage to Kent’s finances, it is the wrong debt, at the wrong time, for the wrong reasons. The priority should have been the council’s £90 million of LOBO loans — ultra-long borrowings with baked-in disadvantages for taxpayers that can haunt budgets into the 2060s.

At the 25 September cabinet meeting, even as the press office hailed a “brave and significant move,” opposition councillors called the repayment a “stunt” and “smoke and mirrors.” The criticism lands, because the repayment leaves the most toxic — and costliest — debt untouched.

What Reform UK Actually Paid – And Why That Matters Less

Reform UK approved an early £50m principal repayment on a conventional council loan. Paying down debt is not, in itself, a mistake; it reduces gross borrowing and stops interest accruing on that slice. But in treasury management, which debt you pay off matters more than how much you pay off.

If one loan is cheap and flexible and another is expensive and inflexible for decades, you always target the latter first. Kent didn’t. The repayment chosen is a tidy headline; it is not a strategic fix for structural costs in the portfolio. That is why critics branded it theatre.

The debt Reform UK didn’t tackle: LOBOs — what they are and why they’re bad value

LOBOs — Lender Option, Borrower Option — are not ordinary loans. They are long-dated deals, often 40–70 years, with a one-sided twist: at pre-set “call” dates the bank can change the interest rate. Only then does the council get its “option” — to accept the higher rate or repay the whole loan, typically within days, and usually at significant cost. Councils cannot exercise their option at will; outside those dates, exiting the loan attracts breakage fees largely at the lender’s discretion. 

Research for Action — the group that helped expose LOBOs a decade ago — summarises the problems in plain terms:

• Built-in asymmetry: the lender holds the real power; the borrower’s “option” is reactive and often unaffordable in practice.

• Embedded derivatives: LOBOs are effectively a fixed-rate loan plus an interest-rate option in the bank’s favour. That complexity was not made clear to many councils at the time of sale.

• Costly over the long run: after teaser periods, coupons typically sit above what the public sector could borrow from the Public Works Loan Board (PWLB). Independent campaigners describe them as “expensive and risky,” with effective costs 2–10% higher than plain public-sector borrowing in comparable periods.

• Lock-in by design: the combination of long maturities, call-date timing, and punitive break fees makes refinancing difficult even when markets improve. 

The wider picture backs this up. Barclays — once a major LOBO player — removed the option features by deed poll in 2016–17, converting its councils’ LOBOs into plain fixed-rate loans. Banks don’t voluntarily give up profitable options unless the product is reputationally toxic or legally vulnerable. Other authorities recorded the change in public reports, and national media and finance titles covered the retreat. 

Campaigners’ “citizen debt audits” and investigations from 2014 onwards repeatedly found that LOBOs loaded councils with decades of above-market costs and decision-making constraints. Legal challenges and scrutiny followed. The lesson is simple: if you want to reduce long-term financing risk and free up future budgets, you deal with LOBOs first.

Kent’s LOBO book: long, rigid and overpriced

Kent County Council still carries £90,000,000 of vanilla LOBOs, originated between 2006 and 2009, from lenders including Dexia and FMS Wertmanagement (the German state “bad bank” that inherited parts of Hypo/Depfa). The loans mature between 2056 and 2069 and carry coupons around 3.70%–4.34% with a weighted average close to 4.15% — well above many refinancing alternatives seen in recent years.

KCC’s own financial disclosures acknowledge a “notional future loss” compared with current market rates — an accounting way of saying the council is locked into paying more than it would if it borrowed today. Meanwhile, while some Barclays LOBOs elsewhere have had their options stripped out, Kent’s remaining Dexia/FMS positions still sit on ultra-long, costly terms. That is the real millstone.

Why the £50m decision is the wrong priority

1) It leaves the worst value debt untouched.
Every £1 left in LOBOs costs more, for longer, than £1 left in ordinary borrowing. The lifetime (net present value) saving from removing a 40–60-year, ~4.15% LOBO is typically far larger than from paying down a cheaper, flexible loan. Reform UK chose the easy win, not the optimal one. 

2) It favours optics over optimisation.
A round-number repayment is media-friendly; a LOBO exit is technical, negotiated and sometimes messy. But serious treasury management is about lifetime cost, not photo-ops. That is why opponents dismissed the move as “smoke and mirrors.” 

3) It misses a continuing window to restructure.
Since 2016, many councils have whittled down LOBO exposure through conversions, negotiated redemptions, and opportunistic refinancing. Every year Kent delays, it prolongs above-market costs and loses optionality if rates or market terms move against it. 

4) It ignores the product’s track record.
When a major lender like Barclays strips out options by deed poll, and civil-society audits call LOBOs “expensive and risky,” the public-interest priority is to neutralise that product first.

What a credible debt-reduction plan would do instead

Publish a full debt optimisation plan.
List every loan: principal, rate, maturity, call dates, break costs and feasible refinancing options. Rank them by lifetime saving potential, not headline size. Show residents the numbers behind any action.

Target LOBOs first, transparently.
Open discussions with Dexia and FMS on conversions to plain fixed-rate debt or full redemptions. Model scenarios across PWLB-equivalent benchmarks and market rates. Bring in independent advisers with no historic LOBO conflicts. Report the net present value of savings and any one-off costs plainly. 

Sequence repayments for maximum value.
Use spare cash, asset-sale proceeds or refinancing headroom to remove the least flexible, highest-cost instruments first (LOBOs), then step down ordinary borrowing.

Stop governing by headline.
Debt management is a technical discipline, not a campaign clip. Announce actions after rigorous option-appraisal, not before.

Verdict

Reform UK is right that Kent needs to cut debt. But leadership is about priorities. On any sober reading of the evidence, the first target should have been the £90m LOBO portfolio: long, rigid, and overpriced — the opposite of what a cash-strapped council needs for the next 40 years. Paying down a conventional £50m loan gives Reform UK a day’s good press. Tackling LOBOs would give Kent’s residents decades of better value.

Quick LOBO glossary (for readers)