Welsh Government says it cannot reduce high interest rate on WRU loan

The Welsh Government said it has no plans to reduce the current 8%-plus interest rate it charges on its £18m loan to the Welsh Rugby Union, saying to do so could see it breaking UK subsidy support rules.

It provided an on commercial terms loan to the union, which it has passed through to the four regions in Cardiff, Newport the Ospreys and the Scarlets (each receiving roughly equal amounts), in spring last year.

The deal refinanced an existing Covid response loan the union had secured through its long-term lender NatWest back in 2020. The Coronavirus Large Business Interruption Loans Scheme (CLBILS) funding from the bank, which formed part of the UK Government’s support measures to businesses during the pandemic, had to be paid off or refinanced after just three years.

The Welsh Government position is that unlike in England, where English Premiership rugby clubs secured Covid support loans from the UK Government at a fixed rate of just 2% repayable by March, 2031, the loan agreement with the union is a distinct commercial lending facility.

As such it argues it had to price the debt at market rates to avoid the threat of any legal challenge under the UK’s Subsidy Control Act - introduced following the UK’s exit for the EU. This means that public bodies cannot provide financial support benefitting recipients below market rates.

While technically a commercial loan and not a Covid response one, from the perspective of the WRU and the four regions it is very much seen as a necessary continuation of the CLBILS loan which was required due to the hugely damaging impact on their respective businesses from the pandemic.

Another counter argument is that a fear of a legal challenge, if the rate was reduced, shouldn’t be a reason for not doing so, especially with rugby being such an important part of Welsh life.

However, it was not as if the Welsh Government had put a gun to the head of the union and its former chief executive Steve Phillips, saying you have to sign on these terms. And civil servants have to be consigant of the danger of falling foul of the Subsidy Control regime, well always acting in the best interests of the taxpayer. Welsh Government officials did rely on its investment bank the Development Bank of Wales when pricing the debt.

The union and the regions could also make a reasoned case that rival clubs in England, while not in receipt of commercial loans, are paying far less to the UK Government on their Covid debt.

The current high interest rate on the loan to the WRU is because when the deal was struck a margin of 3% over the Bank of England’s (BoE) base rate was agreed. At the time the base rate was just 0.75%, so with the 3% margin on top it meant the debt was initially only a little more expensive to finance than the original CLBILS loan with NatWest.

The BoE, in its fight to curb inflation, has since increased the base rate to the current level of 5.25%. That means the regions are paying interest of around 8.25% per annum. While it will fall if the base rate is cut, the market is not anticipating the base rate declining to 3% until 2025.

Collectively the four regions, based on the current BoE interest rate plus the 3% margin, are paying interest to the Welsh Government of circa £1.5m a year - or an average of around £375,000 each. There are then capital payments on top.

In contrast, while not all Premiership rugby clubs in England drew down the same level of funding from the Department of Culture, Media and Sport (DCMS) Bath Rugby - according to its financial year to June, 2022, is in receipt of a DCMS loan of £5.3m, which incurred an interest payment of just over £105,000 in that year.

The Welsh Government did provide the WRU and the four regions each £2.7m in grant support during the pandemic.

The Cardiff Bay government said it is open to dialogue with the union to explore other potential support options under its new chief executive Abi Tierney, who took up her role this week.

Perhaps it would have been prudent if the WRU and the regions had arranged a hedging mechanism - effectively an insurance policy in the event of the base rate rising sharply.

If the Welsh Government did make an exception for the union by reducing the rate, where could a legal challenge come from? Well, other businesses that have similar loans with the Welsh Government, or through the Development Bank of Wales, could say it was unfair if special dispensation is offered to the WRU.

The union and the regions would argue that the current rate is posing a threat to the continuation of the professional game in Wales, while also pointing to the more favourable loan terms to rival clubs in England from the UK Government.

Perhaps the Welsh Government needs to talk to the UK Government to see whether the commercial loan could be reclassified as a Covid response loan, so lifting the danger of any legal challenge.

The Welsh Government has reduced the term of the debt to 2029, having originally agreed 18-years until 2040. One of the attractions of the deal was the length of its repayment term. The Welsh Government says it has been reduced to align with the ending of the union’s existing lending facility with NatWest. However, there is no reason why it couldn’t re-extend the term.

Based on the current capital repayment schedule, in 2029 around £9m would be remaining on the debt. If, for example, the union struck a deal with NatWest, or another bank, it would effectively pay off the remaining balance to the Welsh Government and for it to be added to the sum of a new facility.

The WRU, providing it could find a better deal, could refinance the Welsh Government debt with another provider now.

The funding for the WRU came from the Financial Transactions Capital (FTC) - which comes from UK Treasury. It doesn’t incur any interest with the Welsh Government having to repay the capital over the long-term. That capital is then lent in debt or equity to firms - a funding mechanism that supports the Development Bank of Wales.

A spokesman for the Welsh Government said: "The loan agreement is between the Welsh Government and the Welsh Rugby Union directly and not with the regions. Given the challenges presented by the WRU’s UK Government Coronavirus Large Business Interruption Loan Scheme (CLBILS) loan, the WRU requested a commercial loan from the Welsh Government and agreed to the terms.

"The loan terms must comply with subsidy control regulations - with the agreement that repayment rate follows the base rate, which will fluctuate. We disagree with the suggestion that the Welsh Government is profiteering as all repayments from the loan will get reinvested in public services.

“During the Covid crisis, non-repayable grants were provided by the Welsh Government - with rugby (WRU and the four regions) receiving a total of £13.5m in grant support (around £2.7m grant each).”