North Lanarkshire Properties- Re-Financing October 2023
North Lanarkshire Council · 24 May 2023
Back to Finance and Resources Committee — 24 May 2023 and its agenda
Text extracted from the council's PDF. Layout and reading order may differ from the original.
Page 1
North Lanarkshire Council Report Finance and Resources Committee Does this report require to be approved? ☒ Yes ☐ No Ref EK/CB Date 24/05/23 North Lanarkshire Properties: Re-Financing October 2023 From Elaine Kemp, Chief Officer (Finance) E-mail kempe@northlan.gov.uk Telephone 01698 302408 Executive Summary North Lanarkshire Properties LLP (NLP) financing agreement with its current lender, Barclays Bank, ceases in October 2023 and a new arrangement requires to be put in place to fund the remaining balance of £33m. The ALEO service review in 2017/18, revisited in 2019, identified that retaining NLP as an externalised service delivery vehicle represented best value for the Council. The company has procured external specialist financial and legal advisers to provide professional expertise, including negotiation on NLP’s behalf with the banking sector and financial modelling of the refinancing terms duly offered to enable NLP to make a fully informed decision and achieve best value for the company in terms of its future borrowing requirements. A funding proposal was prepared and submitted to six prospective lenders. Three lenders have provided provisional loan terms and work is underway on financial modelling and evaluation of these terms with a view to identifying a preferred lender to progress a formalised loan offer. This report provides an update on the route to refinancing and seeks approval for the Chief Officer (Finance) to be given delegated authority to approve the finalised terms of NLP’s borrowing on behalf of the Council given the deadline of 31 October 2023 by which the loan agreement and funds must be in place. Recommendations It is recommended that the Finance and Resources Committee: 1. Acknowledges the requirement for NLP to progress a re-financing arrangement with an external lender for £33m; 2. Acknowledges the review work undertaken in 2017/18, and revisited in 2019, which identified that retaining NLP as an ALEO represented best value for the Council; 3. Acknowledges the ongoing evaluation of the provisional loan terms received; and, 4. Agrees that authority be delegated to the Chief Officer (Finance) to approve NLP’s future borrowing on behalf of the Council, including the appointment of the successful lender and finalised loan agreement terms. The Plan for North Lanarkshire Priority Improve North Lanarkshire's resource base Ambition statement (3) Maximise the use of our marketable land and assets through improved development in business and industrial infrastructure
Page 2
1. Background 1.1. Following the decision by North Lanarkshire Council in June 2012 to externalise its commercial property portfolio, North Lanarkshire Properties (NLP) LLP became operational from October 2013 with responsibility for marketing, leasing and managing the Council’s commercial properties. 1.2. NLP acquired the Council’s commercial properties in October 2013 by entering into a £45m loan agreement with Barclays Bank plc to finance the property transfer. The loan facility agreement was agreed for an initial 10-year period and is subject to an 80% guarantee being provided by the Council. The loan agreement generated a capital receipt for the Council and 968 properties transferred from the Council’s commercial property portfolio to the new company. 1.3. In April 2018 the former Infrastructure Committee considered and approved the findings from the 2017/18 ALEO Service Review of NLP which confirmed that the company was performing well against its Service Level Agreement and meeting the Council’s expectations. 1.4. Members of this Committee were advised in March 2023 that this initial 10-year loan facility agreement between NLP and the current lender will terminate on 31 October 2023 and as such the company must now refinance its remaining borrowing requirements, with all contractual agreements between NLP and the lender executed and the funds in place by this date. The Finance and Resources Committee noted the strengthened negotiating position provided through the Council’s 80% loan guarantee and agreed that this provision should continue, thereby enabling NLP to achieve best value in securing its borrowing requirements. 1.5 A project team comprising NLP staff and Council representatives from Enterprise & Communities, Finance, Legal & Democratic and Business & Digital was established in 2022 to support NLP in progressing the refinancing of the outstanding loan. Towards the end of 2022 NLP undertook a procurement exercise to engage financial advisers specialising in this type of transaction. Azets were awarded the contract with their role being to assist the project team in preparing a funding proposal to be issued to prospective lenders, to review offers submitted by lenders and ultimately assist with brokering the new loan arrangements. Shepherd and Wedderburn LLP were appointed by NLP to work in conjunction with Azets and provide legal advice in the negotiation and execution of the new loan facility agreement and security documentation. 2. Report 2023 Refinancing Proposals 2.1 The Loan facility agreed with Barclays Bank plc in 2013 will end on 31st October 2023, at which point the outstanding balance will be approximately £33m. 2.2 Previously in 2017/18, revisited in 2019, the ALEO service review of NLP had confirmed that the company was generally performing well and the externalised service delivery model had fulfilled the Council’s original expectations whilst providing flexible and responsive property services and contributing to the Council’s business plan. The review concluded that the externalised service delivery model should continue and the Improvement Plan, produced as part of the review’s overall recommendations, identified that preparatory work linked to the 2023 refinancing requirement would commence in 2020/21.
Page 3
2.3 Following approval of The Plan for North Lanarkshire in early 2019 and given the relevance of NLP’s strategic objectives to the shared ambitions, particularly those linked to economic opportunities and improving North Lanarkshire’s resource base, further work was undertaken in the autumn of 2019 to revisit whether delivery of the Council’s commercial property functions through NLP remained the best option for service delivery. A series of potential options were considered including early or term settlement of NLP’s existing Loan Facility Agreement, subsequent dissolution of the company and transfer of the properties back to Council ownership and management. Further options included NLP retaining ownership of the properties however operational management would transfer to the proposed Enterprise Strategic Partnership which was in the early planning stages at that time and the Council buying back targeted properties to support The Plan for North Lanarkshire’s shared ambitions. 2.4 Continuing with the status quo and ensuring that NLP’s Management Committee should seek to secure the most advantageous borrowing terms at the time of refinancing in 2023 was assessed as remaining the best option for the Council and the company. Progress Update and Route to Market 2.5 Good progress is being made by the NLP Management Committee and its external financial and legal advisers in engaging with the financial sector and working towards the timeline referenced at 1.4 above. A funding proposal was prepared which outlined the investment opportunity and provided prospective lenders with a suite of information on the background of the company, the property portfolio and details of the financial performance, both historic and projected. This was issued to six banks, including the current lender, with a return date for outline terms set at 31st March 2023. Three of the financial institutions advised that they would not be submitting a return, however, the remaining three banks have engaged and Azets, acting on behalf of NLP, are in direct contact with each of these to ensure that all options are explored to achieve the most advantageous offer for NLP. 2.6 The responses received are exceptionally detailed and Azets are working with the project team to extract all relevant details to allow a comparison of offers to be made. Further clarity is being sought on a number of points and robust financial modelling will require to be completed on the proposals submitted to long term financial sustainability and affordability for NLP. The details currently being reviewed include: • The loan term being offered and the length of the repayment profile; • Margins being offered; • Fees; • Security requirements attached to the proposals; • Interest rates; and, • Covenants being applied. 2.7 From the proposals received the detailed evaluation will focus on 3 key risks: • The impact of fixed versus floating rates, • The covenant conditions, • The security package being requested by the lenders. Decision Making, Authorisation and Governance 2.8 Once the financial modelling is complete and the full evaluation has been undertaken, the external specialist advisers and project team members will be in a position to
Page 4
identify the preferred lender and associated loan agreement terms and present their findings to the NLP Management Committee for consideration, enabling the company representatives to make a fully informed decision. 2.9 The terms of the Partnership Agreement in place between the Council and NLP stipulate that the company must obtain written authority from the Council for important management decisions and borrowing at this level and duration, notwithstanding the Council’s previously approved position as guarantor, falls within this defined requirement. While every effort has been made to align the refinancing timeline with scheduled NLP Management Committee meetings and the Council’s cycle of scheduled meetings, the financial and legal advisers have intimated that it is unlikely that consideration of NLP’s borrowing by this Committee at its meeting on 13 September 2023 will leave sufficient time thereafter to conclude and execute all contractual and security agreements. As such it is requested that the Chief Officer (Finance) is given delegated authority under the Scheme of Delegation to approve NLP’s final loan agreement terms on behalf of the Council, and to reaffirm the Council’s previously approved position as guarantor, once all financial modelling is complete and a preferred, favourable lender is identified. Thereafter a report will be presented to Committee at the appropriate cycle providing details on the outcome including approved lender and loan terms. 3. Measures of success 3.1 Sourcing the required funds at the most advantageous terms to finance North Lanarkshire Properties LLP’s borrowing requirements for the remainder of the loan requirement. 4. Supporting documentation N/A Elaine Kemp Chief Officer (Finance)
Page 5
5. Impacts ( http://connect/report-template-guidance ) 5.1 Public Sector Equality Duty and Fairer Scotland Duty Does the report contain information that has an impact as a result of the Public Sector Equality Duty and/or Fairer Scotland Duty? Yes ☐ No ☒ If Yes, please provide a brief summary of the impact? If Yes, has an assessment been carried out and published on the Council’s website? https://www.northlanarkshire.gov.uk/your-community/equalities/equality- and-fairer-scotland-duty-impact-assessments Yes ☐ No ☐ 5.2 Financial impact Does the report contain any financial impacts? Yes ☒ No ☐ If Yes, have all relevant financial impacts have been discussed and agreed with Finance? Yes ☒ No ☐ If Yes, please provide a brief summary of the impact? There are no direct revenue financial impacts for the Council since the loan repayments are made by NLP and the most advantageous loan terms will be accepted to keep these payments manageable within current trading conditions. The Council’s Finance and Resources Committee previously agreed at its meeting on 1 March 2023, however, to continue to provide security for NLP’s borrowing at the level of 80%. This would represent a risk to the Council of £26.4m over the remainder of the loan agreement, although the forecast trading position of the company and the reserves position, coupled with robust financial oversight and monitoring by the Council’s Finance team under their Service Level Agreement with NLP mitigate the potential likelihood of the risk materialising. (Link to minute extract from Finance and Resources Committee meeting of 1 March 2023) https://mars.northlanarkshire.gov.uk/egenda/images/att100469.pdf 5.3 HR policy impact Does the report contain any HR policy or procedure impacts? Yes ☐ No ☒ If Yes, have all relevant HR impacts have been discussed and agreed with People Resources? Yes ☐ No ☐ If Yes, please provide a brief summary of the impact? 5.4 Legal impact Does the report contain any legal impacts (such as general legal matters, statutory considerations (including employment law considerations), or new legislation)? Yes ☒ No ☐ If Yes, have all relevant legal impacts have been discussed and agreed with Legal and Democratic? Yes ☒ No ☐ If Yes, please provide a brief summary of the impact? A Project Group and Project Board are in place for this task which includes representatives from Legal Services therefore they have been involved since the inception of the project. The main legal impact sits with North Lanarkshire Properties however NLC are the guarantor. External legal advisers have also recently been appointed to assist with the completion of the loan documents.
Page 6
5.5 Data protection impact Does the report / project / practice contain or involve the processing of personal data? Yes ☐ No ☒ If Yes, is the processing of this personal data likely to result in a high risk to the data subject? Yes ☐ No ☐ If Yes, has a Data Protection Impact Assessment (DPIA) been carried out and e- mailed to dataprotection@northlan.gov.uk Yes ☐ No ☐ 5.6 Technology / Digital impact Does the report contain information that has an impact on either technology, digital transformation, service redesign / business change processes, data management, or connectivity / broadband / Wi-Fi? Yes ☐ No ☒ If Yes, please provide a brief summary of the impact? Where the impact identifies a requirement for significant technology change, has an assessment been carried out (or scheduled) by the Enterprise Architecture Governance Group (EAGG)? Yes ☐ No ☐ 5.7 Environmental / Carbon impact Does the report / project / practice contain information that has an impact on any environmental or carbon matters? Yes ☐ No ☒ If Yes, please provide a brief summary of the impact? 5.8 Communications impact Does the report contain any information that has an impact on the Council’s communications activities? Yes ☐ No ☒ If Yes, please provide a brief summary of the impact? 5.9 Risk impact Is there a risk impact? Yes ☒ No ☐ If Yes, please provide a brief summary of the key risks and potential impacts, highlighting where the risk(s) are assessed and recorded (e.g. Corporate or Service or Project Risk Registers), and how they are managed? All financial transactions have an element of risk however these are mitigated by NLP’s ability to continue to meet its loan commitments without any ongoing financial support from the Council. A project risk register is in place and managed by the Project Team and Chief Officer (Assets and Procurement) in his role as Project Lead Officer. 5.10 Armed Forces Covenant Duty Does the report require to take due regard of the Armed Forces Covenant Duty (i.e. does it relate to healthcare, housing, or education services for in-Service or ex- Service personnel, or their families, or widow(er)s)? Yes ☐ No ☒
Page 7
If Yes, please provide a brief summary of the provision which has been made to ensure there has been appropriate consideration of the particular needs of the Armed Forces community to make sure that they do not face disadvantage compared to other citizens in the provision of public services.