Agency’s credit methodology

Credit quality is at the heart of all debt financing and the interests of the UK Municipal Bonds Agency, local authorities and investors are all aligned towards ensuring that the UK Municipal Bonds Agency maintains a rigorous and smart credit process.

The UKMBA will undertake its own credit ratings of the borrowers and will exclude those whom it believes either do not have the necessary credit standing or whose business model, particularly level of commercial property investment and attendant debt, are deemed excessive.

Principles

There are two key principles that underpin the UK Municipal Bonds Agency’s credit process:

  • Rigorous: the process is thorough and consistently applied.
  • Light touch: the credit process will not require significant management time or input from finance teams.  Local authorities publish a wealth of financial information, which in all but the rarest circumstances is more than adequate to complete the bulk of a credit assessment.
Key elements

The UK Municipal Bonds Agency uses a proprietary credit methodology that is built upon those used by the major credit rating agencies, particularly that of Moody’s.  The process is based on four key elements:

  • Credit scoring model
  • Document Review
  • Cohort analysis
  • Discussions with councils

These elements are combined to calculate a credit score for each borrower.  The score that is required for a local authority to be eligible to borrow through the UK Municipal Bonds Agency is set by the Board and periodically reviewed.  In addition, there are a series of “red lines” that should they be crossed by a local authority, automatically mean that a local authority will not be able to borrow e.g. if the accounts of a local authority are qualified.

The credit scoring model generates an idiosyncratic credit score for each local authority.  The score is then adjusted in light of the document review, cohort analysis and discussions with the council.  The credit scoring model is shown below:

The final credit score is translated into a credit rating:

The Board of Directors periodically reviews the minimum credit rating at which the UK Municipal Bonds Agency will lend to local authorities. Typically, this 3-4 levels below that of the UK sovereign rating, which is Aa2 from Moody’s.

Red Lines

The UK Municipal Bonds Agency has a number of “red lines” in its credit policies that if breached, automatically means that an authority has not passed the credit process. The red lines include matters such as the qualification of the local authority’s accounts and a “Section 114 Notice” being unresolved.