LOBO loans (legacy)
About this course
Structure, the 2010s controversies, current state of the LOBO market. Trigger calendars, replacement strategy, option-value framing.
What you'll learn
- What LOBOs are
- The 2010s debate
- Option valuation
- Replacement strategy
- Living with legacy LOBOs
Part of these pathways
Related courses
- SONIA Forward Curve & OIS
- Money Market Funds (CNAV / LVNAV / VNAV)
- Short-duration bond funds & VNAVs
- Intra-LA borrowing & lending markets
- DMADF deep dive
- Term deposits, CDs & T-Bills
Common questions
What is Borrower option?
The right (not obligation) of the LOBO borrower to refuse a proposed new rate and repay the loan at par. From the borrower's perspective, this option has limited value because it triggers in adverse rate environments. Refusal typically means the council needs to refinance immediately at the higher prevailing rates.
What is Broker commission?
Banks paid brokers commissions on LOBO sales to LAs in the 2000s — typically 1-3% of loan value. The commissions were not always disclosed. Some LAs allege they were given LOBOs as cheaper than PWLB without proper option-pricing comparison; the broker commissions were effectively in the loan structure.
What is Embedded option value?
The economic value of the lender option, separate from the loan itself. A LOBO at headline rate 4.50% with the lender holding option might be equivalent to a vanilla loan at 4.50% + 0.50-1.00% in pure economic terms. The option value isn't shown on the council's books but is real.
What is Fixed period?
Initial period (typically 1-5 years) during which the LOBO rate is locked. No lender option exercisable. After the fixed period ends, the loan enters its option-driven phase.
What is Inverse floater LOBOs?
Variant where the proposed new rate is structured as a function of a reference rate — e.g. "if the lender exercises, the new rate is 2 × Bank Rate − 1%". Some councils took these in the 2000s; payouts proved more punitive than expected. Largely refinanced by 2020.
What is Lender option?
The right (not obligation) of the LOBO lender to call the loan periodically. The bank exercises when current market rates exceed the loan rate — i.e. when their position is below market — by proposing a new (typically higher) rate. The borrower then chooses to accept the new rate or repay early at par.