Birmingham City Council: Section 114 Does Not Necessarily Mean a Default on Debt Due to Private Creditors

On 5 September 2023, the Interim Director of Finance of Birmingham City Council issued a Section 114 (3) report. While DBRS Morningstar believes the issue of a section 114 (3) report is a clear signal of a United Kingdom (UK) local authority budgetary distress, it does not necessarily mean that a default on debt due to private creditors is imminent. As for the majority of UK local authorities, the main creditor of Birmingham City Council is the Public Works Loan Board (PWLB), part of the HM Treasury. As of 31 March 2022, around 65% of the Council's financial liabilities were made of PWLB loans. Private creditors accounted for less than 25% of the Council's financial liabilities. Regarding short-term debt liabilities, DBRS Morningstar understands that the Council's main creditors are other UK local authorities. We believe that the ability of Birmingham City Council to honor its debt due to private creditors will mainly depend on the support that will be granted by the UK government and the behavior of other local authorities. In the near term, the Council's capacity to implement rapidly the appropriate measures needed to restore its budgetary balance will also be key.

Key highlights include:
• Birmingham City Council faces strong budgetary imbalances due to specific Equity Pay issues.
• Birmingham City Council's main creditors include the PWLB and other local authorities.
• The support from the UK central government and other local authorities will be key in the short term for Birmingham City Council to honor its debt due to private creditors.

“While the issue of a section 114 (3) report is a clear signal of a UK local authority budgetary distress, it does not necessarily mean that a default on debt due to private creditors is imminent,” said Mehdi Fadli, Senior Vice President in the Global Sovereign Ratings Group. “We believe that the ability of Birmingham City Council to honor its debt due to private creditors will mainly depend on the support that will be granted by the UK government and the behavior of other local authorities.”