News / Monitor confirms new borrowing code

Monitor has confirmed changes to its prudential borrowing code, prompted by the move to international financial reporting standards (IFRS).

In the first few years of foundation trusts the long-term borrowing limits set by the code have been largely academic as FTs have taken up a fraction of their permitted loans (just £171m out of the £3.2bn limit at 31 March 2008). However, under IFRS, assets acquired under the private finance initiative are likely to move on balance sheet, while the finance lease obligations of the PFI schemes may increase long-term borrowing.

In response, Monitor proposed introducing a two-tier borrowing mechanism, which it will now implement, that will give all FTs a tier 1 borrowing limit set using the usual ratios – though the maximum debt-service-to-revenue ratio will be reduced to less than 2.5% from the previous threshold of less than 3%.

The tier 2 limit will accommodate major investments such as PFI schemes. FTs will submit requests for a tier 2 limit, though the limit for trusts with existing PFI schemes will be set automatically at their total borrowing at 1 April 2009.

Having received responses from 40 organisations and discussed its plans with the Department of Health and the Treasury, Monitor has made one clarification to the code proposed in its consultation document. This was on how long a tier 2 limit would remain in place – it said if the project underpinning the request did not materialise the tier 2 limit would be withdrawn.

A number of respondents disagreed with Monitor’s proposal to reduce the tier 1 maximum debt-service-to-revenue threshold. But the regulator said that the new threshold would remain. It had removed the maximum debt to capital ratio in the new code because it believed it introduced potential volatility. Additional controls over tier 1 limits were then needed so it had reduced the debt-service-to-revenue threshold.

Some respondents were concerned tier 2 borrowing should not be restricted to major investments, as defined in the Compliance framework (including PFI schemes). The regulator insisted that section 15 of the code allowed foundations to apply for a limit that exceeded one or more ratios in exceptional circumstances. Examples could include a major renovation or redevelopment programme.