EXECUTIVE - 21 June 2012 AUDIT COMMITTEE - 25 June Head of Finance. Non-key. This report is open to the public.

Transcription

1 EXECUTIVE - 21 June 2012 AUDIT COMMITTEE - 25 June 2012 Subject: Annual Treasury Management Report 2011/12 Director/Head of Service: Decision Issues: Decision type: Classification: CCC Ward(s): Summary: To Recommend: Head of Finance These matters are within the authority of the Committee Non-key This report is open to the public. All This report details the results of the council s treasury management activities in the financial year ending 31 March That the report be noted SUPPORTING INFORMATION 1. Introduction The Chartered Institute of Public Finance and Accountancy s Code of Practice on Treasury Management as revised in November 2009 was adopted by this council on 17 February 2011 and this council fully complies with its requirements. The primary requirements of the Code are: a) Creation and maintenance of a Treasury Management Policy Statement which sets out the policies, objectives and approach to risk management of the Council s treasury management activities. b) Creation and maintenance of Treasury Management Practices which set out the manner in which the Council will seek to achieve those policies and objectives and prescribing how it will manage and control these activities. c) Receipt by the council of an annual strategy and plan in advance of the year, a midyear review and an annual report of the previous year after its close. d) Delegation by the council of responsibilities for implementing and regular monitoring treasury management policies and practices and for the execution and administration of treasury management decisions. e) The nomination of a committee to be responsible for ensuring effective scrutiny of the treasury management strategy and policies. Treasury Management in this context is defined as: The management of the local authority s investments and cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks. This annual report covers:

2 the council s current treasury position performance measurement the borrowing strategy for 2011/12 the borrowing outturn for 2011/12 compliance with treasury limits investment strategy for 2011/12 investment outturn for 2011/12 debt rescheduling CIPFA issued the revised Code of Practice for Treasury Management in November 2009, following consultation with Local Authorities during the summer. The revised Code suggests that members should be informed of Treasury Management activities at least twice a year, but preferably quarterly. Up to September 2011, reports were issued quarterly; however, the reports tended to be repetitive and the Council felt that henceforth it would only necessary for reports to be issued half-yearly with the June and December reports being discontinued. This report confirms that the Council has complied with the requirement under the Code to give prior scrutiny to all of the treasury management reports by the Audit Committee before they were reported to the full Council. Member training on treasury management issues was undertaken during the year on 26 September 2011 in order to support Members scrutiny role. 2. Current Portfolio Position The Council s portfolio position at the end of the current year and the preceding year was as follows: Fixed rate funding: PWLB* PWLB HRA Market Variable rate Funding: Total Debt Investments: in house ** call account/s Total Investments 31 March 2012 Principal 37.40m 96.83m 2.00m Nil 5.38m 7.16m m Nil m 12.54m Rate 3.95% 2.47% 2.00% 2.87% 31 March 2011 Principal 37.47m 2.00m Nil 39.47m 15.00m 1.60m 16.60m Rate 3.97% 3.97% * PWLB = Public Works Loan Board ( 4m of this has been loaned to Kent County Cricket Club). ** The figures exclude 1.16m ( 1.91m in 2011) deposited in the Heritable Bank. 3. Economic Background The economic background for the quarter is covered in appendix A.

3 4. Interest Rates An account of interest rates for the year is covered in appendix B. The earliest rise in base rate is not now expected until the second half of The Strategy for 2011/12 Annual Investment Strategy: The Treasury Management Strategy Statement (TMSS) for 2011/12 was approved by Council on 17 February. The Council s Annual Investment Strategy, which is incorporated in the TMSS, outlines the Council s investment priorities as follows: Security of Capital Liquidity Internally Managed Investments The authority manages its cash flow investments inhouse and invests with the institutions listed in the authority s approved lending list. The authority invests for a range of periods from a week to 365 days dependent on cash flow and the interest rates on offer. However, following the banking crisis in autumn 2008, the council has made changes in our investment strategy to one that is more risk averse. It should be borne in mind that all possible strategies contain some element of risk. However, the majority of the current investments are with financial institutions which are guaranteed by the government, either directly or indirectly. Borrowing: Prudential Indicators: It is a statutory duty for the Council to determine and keep under review the Affordable Borrowing Limits. Council s approved Prudential Indicators (affordability limits) are outlined in the approved TMSS. (A full list of the approved limits is shown in Appendix D) Officers can confirm that the Prudential Indicators were not breached during the financial year 2011/12. Compliance with Treasury Limits/Prudential Borrowing Limits During the year the council operated within the treasury limits and Prudential Indicators set out in the council s Treasury Policy Statement and annual Treasury Strategy Statement. The total debt outstanding is m against an authorised limit of 151.3m. 6. Borrowing Outturn for 2011/12 Treasury Borrowing The Council s underlying need to borrow for capital expenditure is termed the Capital Financing Requirement (CFR). This figure is a gauge of the Council s debt position. The CFR results from the capital activity of the Council and what resources have been used to pay for the capital spend. It represents the 2011/12 unfinanced capital expenditure and prior years net or unfinanced capital expenditure which has not yet been paid for by revenue or other resources.

4 Part of the Council s treasury activity is to address the funding requirements for this borrowing need. Depending on the capital expenditure programme, the treasury service organises the Council s cash position to ensure sufficient cash is available to meet the capital plans and cash flow requirements. This may be sourced through borrowing from external bodies (such as the Government, through the Public Works Loan Board [PWLB] or the money markets), or utilising temporary cash resources within the Council. Reducing the CFR the Council s (non HRA) underlying borrowing need (CFR) is not allowed to rise indefinitely. Statutory controls are in place to ensure that capital assets are broadly charged to revenue over the life of the asset. The Council is required to make an annual revenue charge, called the Minimum Revenue Provision MRP, to reduce the CFR. This is effectively a repayment of the non-housing Revenue Account (HRA) borrowing need (there is no statutory requirement to reduce the HRA CFR). This differs from the treasury management arrangements which ensure that cash is available to meet capital commitments. External debt can also be borrowed or repaid at any time, but this does not change the CFR. The Council s 2011/12 MRP Policy (as required by CLG Guidance) was approved as part of the Treasury Management Strategy Report for 2011/12 on 17/02/2011. The Council s CFR for the year is shown below, and represents a key prudential indicator. Housing finance reform has abolished the housing subsidy system financed by central government and consequently, all housing debt has been reallocated nationally between housing authorities. The result of this reallocation is that this Council has made a capital payment to the Department of Communities and Local Government of 96,828k. This has resulted in an increase in the CFR and total borrowing by that figure at the end of the year which was financed by new external borrowing. There has been no impact on HRA revenue finances in 2011/12 due to compensating adjustments being made in the HRA determination. The details of the loan are as follows: Date of Lender Principal Period Interest Rate Type Advance PWLB 96,828, years 2.47% Annuity loan No PWLB loans have been repaid this year. Debt Performance - The average debt portfolio interest rate for the year has fallen to 2.87% (down from a rate of 3.97% at the end of 2010/11). The council will continue to monitor rates and decide whether it is better to fund expenditure from borrowing or from maturing investments. An account of PWLB interest rate movements is given in appendix B. 7. Investments Outturn for the year 2011/12 Detailed below is the result of the investment strategy undertaken by the Council: Internally Managed Investments A full list of investments held as at 31 March 2012, and details of Fitch s credit ratings are shown in Appendix C, together with further information.

5 As covered in appendix B, investment rates available in the market continue to be at an historical low point. The average level of funds available for investment purposes in the year 2011/12 was 12,890,710. These funds were available on a temporary basis, and the level of funds available was mainly dependent on the timing of precept payments, receipt of grants and progress on the Capital Programme. Investment performance for year ended : Benchmark Benchmark Return Council Performance Investment Interest Earned 3 month LIBID 0.82% 1.63% 209,682 As illustrated, the authority outperformed the benchmark by 81 basis points. Fixed Term Deposits The council had 5m deposited for fixed terms as at 31 March 2012, plus the 384k placed in an escrow account in Icelandic by the Glitnir Bank. The details are in appendix C. Call accounts From 1 April 2002 S.I.451 gave local authorities the power to invest in a new investment known commonly as a Money Market Fund (MMF). MMFs can generate much better returns than funds invested overnight with the bank because funds are pooled to allow investors to benefit from wholesale rates and because they are invested in a range of high quality securities and they utilise experienced fund managers. All the funds used have the highest credit rating of AAA. The decision which fund to invest in is based on which is offering the highest current rate of return, subject to the maximum limits as laid down in the treasury management strategy, plus the ease of transactions where small amounts are involved. Global Treasury Funds plc (Money Market Fund) The Council, on 16 December 2002, approved the use of the Royal Bank of Scotland s Global Treasury Funds. The return for the year ended 31 March 2012 was 9,924 on an average balance of 1,563,665 producing an average rate of 0.64%. This is a reasonable return in the current climate and compares favourably with the alternative investment in Overnight funds where the rate in a good quality bank has fallen to 0.25%. Santander UK (formerly Alliance & Leicester Commercial Bank) Acting upon advice received from Sector, the council s treasury management advisors, a call account was opened on 21 August 2007 with the Alliance & Leicester, which subsequently became part of the Santander UK group. The return on funds invested in this account for the year ended 31 March 2012 was 27,125 on an average balance of 3,381,483 producing an average return of 0.8%. This is now, along with the new NatWest Special Interest Bearing Account, the council s best performing instant access account. However, in the light of recent problems in the Eurozone, particularly some of the Spanish banks, officers decided several months ago not to place any further deposits in Santander UK. Therefore, the Council currently has no cash deposited with this bank. Henderson Liquid Assets Fund

6 In order to enhance the liquidity and security of the council s investments, a further money market fund was opened in December The council s advisors assisted with selecting a suitable fund, and it was decided to use the above AAA rated fund, which was currently giving one of the best returns in the market. The fund was one of the larger funds and had been in the market for a relatively long time. Early in 2010 this fund was transferred to Deutsche Bank and since then no further deposits have been placed in it. NatWest Special Interest Bearing Account (SIBA) Our bank notified us of the above account, which if operated according to certain criteria, would generate a return of 0.8%, the same as the Santander UK and better than the existing Money Market Funds. Opening this account also enabled us to avoid having over 10m placed with any single fund, a requirement of the Treasury Management Strategy introduced in 2010/11. Accordingly, an account was opened with NatWest at the end of the fourth quarter, 2009/10. During the year 2011/12 a return of 44,613 was received on an average investment of 5,566,077, a rate of 0.8%. Ignis Liquidity Fund In accordance with the treasury management strategy which allows us to hold up to four money market funds, arrangements have been made to open up this new fund for use after 1 April Like the other funds, Ignis Liquidity Funds are AAA rated, and we can arrange for redemptions and subscriptions daily. We were assisted in our selection of this fund by our treasury advisors, Sector who advised that the return on this fund was one of the best in the market. SUMMARY OF INVESTMENTS FOR THE YEAR 2011/12 Investment Fixed Term Deposits In-house* (See appendix C for details) Call accounts Internal benchmark 7 day LIBID Average value of Funds 2011/12 Net Return Net Rate of Return for the year % 12,890, , Global (MMF) Fund 1,563,665 9, Santander UK 3,381,483 27, NatWest SIBA 5,566,077 44, TOTAL INVESTMENTS* 23,401, , * These figures exclude Icelandic investments averaging 3,374,196; we do not expect to receive any further interest receipts on these investments. The Council s total budgeted investment return for 2011/12 was 236,500 and the performance for the year exceeded the budget by 55k. 8. Icelandic Investments

7 Councillors will be aware that the Council had 6m deposited in Icelandic banks when they collapsed in October Heritable Bank As shown in appendix C, the council had 4m deposited with the Heritable Bank, 2m of which should have been returned in December 2008 and 2m in January We started to receive repayments from the administrators of the Heritable on 30 July 2009 with a receipt of 673,871, and have been receiving repayments approximately quarterly ever since. The total received to 31 March 2012 was 2,838,299 and a further repayment of 158,361 was received on 20 April We are now expecting to receive further dividends on a quarterly basis until we recover a total of approximately 3.7m (an increase over the previous estimate of 3.5m) based on reports received from the administrators. There has been discussion about bonds in the new domestic banks in Iceland being issued to any creditors who have not had their deposits reimbursed in full. At this stage we have very little information as to what form these bonds may take or how we could convert them into cash. This is now only likely to be relevant with respect to a shortfall in repayments from the Heritable Bank as we expect to receive back more than the original 2m invested in Glitnir. Glitnir Bank The winding-up committee of the Glitnir Bank has accepted the priority status of local authority creditors and made repayments totalling 1.67m of our 2m deposit in a basket of currencies as previously reported. A further sum of 77m Icelandic kroner has been placed in an escrow account for our benefit in Iceland. Due to the exchange controls imposed by the Icelandic government it is very difficult at the moment to convert this sum into sterling and we would lose a substantial amount if we tried to do so. This deposit is currently earning interest of 3.4% which will also be credited to us, and at the year end at the official exchange rate, was worth 384k. The Local Government Association is co-ordinating local authorities reactions to this situation. Some local authorities wish to realise the sterling value of the deposit, which if possible at all, would result in a loss of value of possibly a third to a half. Other authorities consider it is best left in Iceland (where it is attracting a rate of interest above what could normally be received in the UK), until the exchange controls are relaxed and we can convert it into sterling. It is also possible that by then, the exchange rate will have moved in our favour and the deposit would be worth substantially more. Any shortfall in the recovery of funds invested in these banks is expected to be covered by the amount of windfall VAT that has been set aside for this purpose. 9. Implications (a) (b) Financial Implications contained in the body of the report Legal Implications contained in the body of the report Other implications (c) (d) Staffing/resource - none Property Portfolio - none

8 (e) (f) (g) (h) (i) (j) (k) Environmental/Sustainability - none Planning/Building Regulations - none Human Rights issues - none Crime and Disorder - none Biodiversity - none Safeguarding Children - none Energy efficiency - none 10. Conclusions The results of the council s treasury management activities for the year ended 31 March 2012 are set out for the Committee to note. Contact Officers: Ian Cooke Telephone: Liz Williams

9 Appendix A Economic Background and Interest Rates Sovereign debt crisis. 2011/12 was the year when financial markets were on tenterhooks throughout most of this period, fearful of the potential of another Lehmans type financial disaster occurring, sparked off by a precipitous Greek default. At almost the last hour, the European Central Bank (ECB) calmed market concerns of a liquidity crisis among European Union (EU) banks by making available two huge three year credit lines, totalling close to 1 trillion at 1%. This also provided a major incentive for those same banks to then use this new liquidity to buy EU sovereign debt yielding considerably more than 1%. A secondary benefit of this initiative was the bringing down of sovereign debt yields, for the likes of Italy and Spain, below panic levels. The final planks in the calming of the EU sovereign debt crisis were two eleventh hour agreements: one by the Greek Government of another major austerity package and the second, by private creditors, of a haircut (discount) on the value of Greek debt that they held, resulting in a major reduction in the total outstanding level of Greek debt. These agreements were a prerequisite for a second EU / IMF bailout package for Greece which was signed off in March. Despite this second bailout, major concerns remain that these measures were merely a postponement of the debt crisis, rather than a solution, as they did not address the problem of low growth and loss of competitiveness in not only Greece, but also in other EU countries with major debt imbalances. These problems will, in turn, also affect the financial strength of many already weakened EU banks during the expected economic downturn in the EU. There are also major questions as to whether the Greek Government will be able to deliver on its promises of cuts in expenditure and increasing tax collection rates, given the hostility of much of the population. In addition, an impending general election in April / May 2012 will deliver a democratic verdict on the way that Greece is being governed under intense austerity pressure from the northern EU states. The UK coalition Government maintained its aggressive fiscal policy stance against a background of warnings from two credit rating agencies that the UK could lose its AAA rating. Key to retaining this rating will be a return to strong economic growth in order to reduce the national debt burden to a sustainable level, within the austerity plan timeframe. The USA and France lost their AAA ratings from one rating agency during the year. UK growth proved mixed over the year. In quarter 2, growth was zero, but then quarter 3 surprised with a return to robust growth of 0.6% q/q before moving back into negative territory (-0.2%) in quarter 4. The year finished with prospects for the UK economy being decidedly downbeat due to a return to negative growth in the EU in quarter 4, our largest trading partner, and a sharp increase in world oil prices caused by Middle East concerns. However, there was also a return of some economic optimism for growth outside the EU and dovish comments from the major western central banks: the Fed in America may even be considering a third dose of quantitative easing to boost growth. UK CPI inflation started the year at 4.5% and peaked at 5.2% in September. The fall out of the January 2011 VAT hike from the annual CPI figure in January 2012 helped to bring inflation down to 3.6%, falling further to 3.4% in February. Inflation is forecast to be on a downward trend to below 2% over the next year. The Monetary Policy Committee agreed an increase in quantitative easing (QE) of 75bn in October on concerns of a downturn in growth and a forecast for inflation to fall below the 2% target. QE was targeted at further gilt purchases. The MPC then agreed another round of 50bn of QE in February 2012 to counter the negative impact of the EU debt and growth crisis on the UK. Gilt yields fell for much of the year, until February, as concerns continued building over the EU debt crisis. This resulted in safe haven flows into UK gilts which, together with the two

10 UK packages of QE during the year, combined to depress PWLB rates to historically low levels. Bank Rate was unchanged at 0.5% throughout the year while expectations of when the first increase would occur were steadily pushed back until the second half of 2013 at the earliest. Deposit rates picked up in the second half of the year as competition for cash increased among banks. Risk premiums were also a constant factor in raising money market deposit rates for periods longer than 1 month. Widespread and multiple downgrades of the ratings of many banks and sovereigns, continued Euro zone concerns, and the significant funding issues still faced by many financial institutions, meant that investors remained cautious of longer-term commitment.

11 Appendix B Interest Rates in 2011/12 PWLB borrowing rates - the graphs and table for PWLB maturity rates below show, for a selection of maturity periods, the high and low points in rates, the average rates, spreads and individual rates at the start and the end of the financial year. PWLB BORROWING RATES 2011/12 for 1 to 50 years month variable 01/04/ % 2.420% 2.870% 3.280% 3.650% 4.800% 5.360% 5.280% 1.570% 31/03/ % 1.420% 1.590% 1.810% 2.050% 3.200% 4.310% 4.350% 1.560% HIGH 1.970% 2.470% 2.930% 3.350% 3.730% 4.890% 5.430% 5.340% 1.590% LOW 1.190% 1.320% 1.500% 1.710% 1.940% 3.010% 3.940% 3.980% 1.560% Average 1.466% 1.693% 1.958% 2.243% 2.533% 3.702% 4.610% 4.635% 1.561% Spread 0.780% 1.150% 1.430% 1.640% 1.790% 1.880% 1.490% 1.360% 0.030% High date 06/04/ /04/ /04/ /04/ /04/ /04/ /04/ /04/ /04/2011 Low date 29/12/ /12/ /12/ /02/ /02/ /12/ /01/ /11/ /04/2011

12 Investment Rates in 2011/12 The tight monetary conditions following the 2008 financial crisis continued through 2011/12 with little material movement in the shorter term deposit rates. However, one month and longer rates rose significantly in the second half of the year as the Eurozone crisis grew. The ECB s actions to provide nearly 1 trillion of 1% 3 year finance to EU banks eased liquidity pressures in the EU and investment rates eased back somewhat in the quarter 1 of This action has also given EU banks time to strengthen their balance sheets and liquidity positions on a more permanent basis. Bank Rate remained at its historic low of 0.5% throughout the year while market expectations of the imminence of the start of monetary tightening was gradually pushed further and further back during the year to the second half of 2013 at the earliest. Overlaying the relatively poor investment returns were the continued counterparty concerns, most evident in the Euro zone sovereign debt crisis which resulted in a second rescue package for Greece in the first quarter of Concerns extended to the potential fallout on the European banking industry if the crisis ended with Greece leaving the Euro and defaulting. Moneymarket investment rates 2011/12 % Overnight 7 day 1 month 3 months 6 months 1 year

13 01/04/ /03/ High Low Average Spread High Date 30/06/ /12/ /01/ /01/ /01/ /01/2012 Low Date 14/03/ /04/ /04/ /04/ /06/ /06/ Investment Rates Rate (%) day LIBID 3 mth LIBID 6 mth LIBID Bank Rate 1 yr LIBID LIBID = London interbank Bid rate the rate at which banks borrow from each other Appendix C Annual Investment Strategy and details of investments at 31 March 2012 The Council will also aim to achieve the optimum return (yield) on investments commensurate with proper levels of security and liquidity, which are the Council s investment priorities. In the current economic climate it is considered appropriate to keep investments short term to cover short term cash flow needs but also to seek out value available in significantly higher rates in periods up to 12 months with highly credit rated financial institutions, using Sector s suggested creditworthiness approach, including sovereign credit

14 rating and Credit Default Swap (CDS) overlay information provided by Sector: this applies in particular to nationalised and semi nationalised UK banks. A full list of investments held as at 31 March 2012 is shown below: Borrower Principal Interest Rate Dates Current Fitch ratings (notes 2 & 3) From To Longterm Shortterm Viability Support Lloyds Bank 2,000, % 06/05/11 27/07/12 A F1 bbb 1 Lloyds Bank 3,000, % 28/02/12 13/02/13 A F1 bbb 1 RBS Global Treasury 161, % N/A Call account AAA Santander UK 1, % N/A Call account A+ F1 aa- 1 NatWest 7,013, % N/A Call account A F1 1 Borrower Icelandic Exposure Principal ( ) Interest Rate Start Date Maturity Date Glitnir Bank 383, % 16/03/12 D D 5 Heritable Bank 1,161, % 18/12/07 17/12/08 WD WD WD WD Total Investments Total Investments excluding Icelandic exposure Total Investments Icelandic exposure (Note 1) 13,721,462 12,176, % 1,545, % Notes 1. We received a further 158, from the administrators of the Heritable Bank on 20 April, The Fitch rating of WD refers to the fact that Fitch has withdrawn ratings on this institution. 3. The definitions of the Fitch ratings are as follows: - Long-term gives an indication of the credit risk in the long term i.e. over one year Short-term gives an indication of the credit risk in the short term i.e. less than one year Viability the intrinsic creditworthiness of the financial institution Support the likelihood than an institution will receive external support if it should get into difficulties.

15 Fitch Ratings International Long-Term Credit Ratings International Long-Term Credit Ratings (LTCR) may also be referred to as Long-Term Ratings. When assigned to most issuers, it is used as a benchmark measure of probability of default and is formally described as an Issuer Default Rating (IDR). The following rating scale applies to foreign currency and local currency ratings: Investment Grade AAA Highest credit quality. 'AAA' ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. AA Very high credit quality. 'AA' ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. A High credit quality. 'A' ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings. BBB Good credit quality. 'BBB' ratings indicate that there are currently expectations of low credit risk. The capacity for payment of financial commitments is considered adequate but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment grade category. Speculative Grade BB Speculative. 'BB' ratings indicate that there is a possibility of credit risk developing, CCC For issuers and performing obligations, default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favourable business or economic conditions. C For issuers and performing obligations, default is imminent. International Short-Term Credit Ratings The following ratings scale applies to foreign currency and local currency ratings. A Shortterm rating has a time horizon of less than 13 months for most obligations. Short-term ratings thus place greater emphasis on the liquidity necessary to meet financial commitments in a timely manner. F1 Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; may have an added "+" to denote any exceptionally strong credit feature. F2 Good credit quality. A satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings. F3 Fair credit quality. The capacity for timely payment of financial commitments is adequate; however, near term adverse changes could result in a reduction to non investment grade.

16 B Speculative. Minimal capacity for timely payment of financial commitments, plus vulnerability to near term adverse changes in financial and economic conditions. C High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon a sustained, favourable business and economic environment. D Indicates an entity or sovereign that has defaulted on all of its financial obligations. Notes to International Short-Term ratings: The modifiers "+" or "-" may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the 'AAA' Long-term rating category, to categories below 'CCC', or to Short-term ratings other than 'F1'. Rating Watch: Ratings are placed on Rating Watch to notify investors that there is a reasonable probability of a rating change and the likely direction of such change. These are designated as "Positive", indicating a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may be raised, lowered or maintained. Rating Watch is typically resolved over a relatively short period. Rating Outlook: An Outlook indicates the direction a rating is likely to move over a one to two-year period. Outlooks may be positive, stable or negative. A positive or negative Rating Outlook does not imply a rating change is inevitable. Similarly, ratings for which outlooks are 'stable' could be upgraded or downgraded before an outlook moves to positive or negative if circumstances warrant such an action. Occasionally, Fitch Ratings may be unable to identify the fundamental trend. In these cases, the Rating Outlook may be described as evolving. Bank Viability Ratings Viability ratings (VRs) are designed to be internationally comparable and represent Fitch's view as to the intrinsic creditworthiness of an issuer. Together with the agency's support ratings framework, the VR is a key component of a bank's Issuer Default Rating. VRs represent not only the capacity of a rated entity to meet its obligations in the absence of extraordinary support but also in the absence of extraordinary constraints (e.g., transfer and convertibility risk). As such, VRs represent the capacity of the bank to maintain ongoing operations and to avoid failure, the latter being indicated by extraordinary and company specific measures becoming necessary to protect against a bank's default. aaa: Highest fundamental credit quality 'aaa' ratings denote the best prospects for ongoing viability and lowest expectation of failure risk. They are assigned only to banks with extremely strong and stable fundamental characteristics, such that they are most unlikely to have to rely on extraordinary support to avoid default. This capacity is highly unlikely to be adversely affected by foreseeable events. aa: Very high fundamental credit quality 'aa' ratings denote very strong prospects for ongoing viability. Fundamental characteristics are very strong and stable; such that it is considered highly unlikely that the bank would have to rely on extraordinary support to avoid default. This capacity is not significantly vulnerable to foreseeable events.

17 a: High fundamental credit quality 'a' ratings denote strong prospects for ongoing viability. Fundamental characteristics are strong and stable, such that it is unlikely that the bank would have to rely on extraordinary support to avoid default. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings. bbb: Good fundamental credit quality 'bbb' ratings denote good prospects for ongoing viability. The bank's fundamentals are adequate, such that there is a low risk that it would have to rely on extraordinary support to avoid default. However, adverse business or economic conditions are more likely to impair this capacity. bb: Speculative fundamental credit quality 'bb' ratings denote moderate prospects for ongoing viability. A moderate degree of fundamental financial strength exists, which would have to be eroded before the bank would have to rely on extraordinary support to avoid default. However, an elevated vulnerability exists to adverse changes in business or economic conditions over time. b: Highly speculative fundamental credit quality 'b' ratings denote weak prospecits for ongoing viability. Material failure risk is present but a limited margin of safety remains. The bank's capacity for continued unsupported operation is vulnerable to deterioration in the business and economic environment. ccc: Substantial fundamental credit risk Failure of the bank is a real possibility. The capacity for continued unsupported operation is highly vulnerable to deterioration in the business and economic environment. cc: Very high levels of fundamental credit risk Failure of the bank appears probable. c: Exceptionally high levels of fundamental credit risk Failure of the bank is imminent or inevitable. f: 'f' ratings indicate an issuer that, in Fitch's opinion, has failed, and that either has defaulted or would have defaulted had it not received extraordinary support or benefited from other extraordinary measures. Individual Ratings Individual Ratings are assigned only to banks. These ratings, which are internationally comparable, attempt to assess how a bank would be viewed if it were entirely independent and could not rely on external support. These ratings are designed to assess a bank's exposure to, appetite for, and management of risk, and thus represent our view on the likelihood that it would run into significant difficulties such that it would require support. The principal factors we analyze to evaluate the bank and determine these ratings include profitability and balance sheet integrity (including capitalization), franchise, management, operating environment, and prospects. Finally, consistency is an important consideration, as is a bank's size (in terms of equity capital) and diversification (in terms of involvement in a variety of activities in different economic and geographical sectors). A denotes: D denotes:

18 A very strong bank. Characteristics may include outstanding profitability and balance sheet integrity, franchise, management, operating environment or prospects. B denotes: A strong bank. There are no major concerns regarding the bank. Characteristics may include strong profitability and balance sheet integrity, franchise, management, operating environment or prospects. C denotes: An adequate bank, which, however, possesses one or more troublesome aspects. There may be some concerns regarding its profitability and balance sheet integrity, franchise, management, operating environment or prospects. A bank, which has weaknesses of internal and/or external origin. There are concerns regarding its profitability and balance sheet integrity, franchise, management, operating environment or prospects. Banks in emerging markets are necessarily faced with a greater number of potential deficiencies of external origin. E denotes: A bank with very serious problems, which either requires or is likely to require external support. F denotes: A bank that has either defaulted or, in Fitch s opinion, would have defaulted if it had not received external support. Examples of such support include state or local government support, (deposit) insurance funds; acquisition by some other corporate entity or an injection of new funds from its shareholders or equivalent. Notes: Gradations may be used among the five ratings: i.e. A/B, B/C, C/D, and D/E. (s) An Individual rating may be followed by the suffix (s), denoting that it is largely based on public information, though supplemented by data obtained from the rated entity.

19 Appendix D - Prudential Indicators financial year 2010/11 onwards (after revision due to HRA self-financing) Borrowing Requirement New Borrowing 2010/ / / / General Fund 9,263 3,557 1,401 0 HRA 684 2, HRA self-financing payment to DCLG 0 96, TOTAL 9, ,355 1,401 0 Affordable Borrowing Indicator The estimate of the incremental impact of capital investment decisions for 2011/ /14 proposed in the capital programme reports, over and above capital investment decisions that have previously been taken by the council (and prior to the borrowing for the HRA self-financing payment) are: 2011/ / /14 Add n l Gen. Fund Revenue Costs of Borrowing 36k 356k 472k Additional HRA Costs of Borrowing 99k 217k 217k Affordable Borrowing Indicator Increase in council tax per annum ( for a band D property ) 0.69p 6.77p 8.90p Increase in housing rent per week 0.23p 0.50p 0.48p Financing Costs Financing costs are Principal and Interest Payable less Interest Receivable. The indicator uses the ratio of these to the net revenue stream which is equivalent to: the budget requirement i.e. the amount to be met from government grant and local taxpayers (for general fund) and the amount to be met from housing subsidy and rent income (for the HRA). Ratio of financing costs to net revenue stream 2010/ / / /14 % % % % General Fund HRA The costs above are all financing costs not just those incurred in relation to the latest capital programme. Without comparative figures from other local authorities at this stage it is difficult to comment on the above figures other than to note that the % for general fund is increasing from 2010/11- because of the assumed increase in net borrowing. It is

20 however lower than previous years because of the assumed additional interest earned on capital receipts. Limit on net borrowing (i.e. borrowing less investments) In order to ensure that over the medium term, net borrowing will only be for a capital purpose, the local authority has to ensure that net external borrowing does not, except in the short term, exceed the total of capital financing requirement in the preceding year ( 41,360k estimated at 31/03/11 derived from the balance sheet) plus the estimates of any additional capital financing requirement for the next three financial years i.e. 145,300k for General Fund and the Housing Revenue Account (HRA). This could have constrained the programme, but although Canterbury s borrowing has now exceeded its investments, as predicted in the previous strategy report, there still shouldn t be any difficulty in meeting this requirement due to the substantial level of the investments. In future years the amount by which the borrowing exceeds the investments will increase as a result of financing the large capital programme in 2010/11; however the net borrowing will still be considerably less than the 145,300k above. Limits on external debt (gross) The first limit ( the authorised limit ) is the actual maximum limit for external debt. The second limit ( the operational boundary ) is based on the same estimates as the authorised limit but reflects the Director of Corporate Services estimate of the most likely, prudent but not worst case scenario, without the additional room included within the authorised limit. Treasury Management Prudential Indicators 2010/11 Approved 2011/ / /14 The Authorised Limit for external debt Borrowing 41, , , ,800 Other long term liabilities (e.g. long-term debtors Mortgagors, Housing Act Advances, Misc.Loans) 1,300 1,300 1,300 1,300 TOTAL 42, , , ,100 Operational boundary for external debt Borrowing 40, , , ,800 Other long term liabilities (e.g. long-term debtors Mortgagors, Housing Act Advances, Misc.Loans) 1,200 1,200 1,200 1,200 TOTAL 41, , ,600 53,000 The above figures from 2011/12 started from the current level of external debt 37.5m (as at the time the report was written) and added 5m, say, for temporary debt for the operational boundary and 6m for the authorised limit and then added on the total new borrowing requirements set out above. Interest Rate Exposures (Interest payable on borrowing LESS interest receivable on investments)

21 Interest rate risk management is a top priority for local authorities. While fixed-rate borrowing and investment can contribute to reducing the uncertainty surrounding future interest rate projections, in times of fluctuating rates, in order to generate optimum performance, it is advisable to retain a degree of flexibility through the use of variable interest rates on at least part of the treasury management portfolio. However for some years now, the differential payable on variable-rate borrowing has made this option less attractive. The setting of upper limits has the effect of setting ranges within which an authority would limit its exposure to both fixed and variable interest rate movements. Upper limit for interest rate exposure 2010/11 Approved 2011/ / /14 % % % % Fixed interest rate exposure Variable interest rate exposure Maturity Structure of Borrowing This indicator is designed to be a control over an authority having large concentrations of fixed rate debt needing to be replaced at times of uncertainty over interest rates. The maturity structure of borrowing 2010/11 Approved 2011/ / /14 Limits of amount of projected borrowing that is fixed rate, maturing in each period as a percentage of total projected borrowing that is fixed rate: % % % % Under 12 months months and within 24 months months and within 5 years years and within 10 years years and above Currently, just under 35% of the borrowing is repayable within 2-5 years with the remainder maturing in more than 10 years. However, the repayment dates of these loans are spread across a variety of periods from 2036 to The above percentages start from the current maturity structure of our debt and then allow for all the new borrowing to be taken out at each level of maturity, plus replacement borrowing of the same value as the debt due to mature in 2013/14.