By Gareth Vaughan
The freshly minted Local Government Funding Agency (LGFA), or council bond bank, aims to borrow its first money in mid-February, and hopes to borrow a total of about NZ$1 billion this year through New Zealand Debt Management Office (NZDMO) style tenders.
LGFA chairman Craig Stobo told interest.co.nz whether the organisation runs fortnightly or monthly tenders will be up to LGFA chief executive Philip Combes, formerly boss of government debt manager NZDMO, who starts in his new role next week.
"We're targeting the middle of next month for the first issue," Stobo said. "The size of that is under discussion in terms of a number of aspects including tenor, as well as dollars to be put out to the marketplace and that requires obviously talking to investors as much as it does talking to the local authorities who will be using us. That's in train now."
"In terms of the whole year, we'd expect a billion dollars of issuance to occur at some stage through the course of this calendar year," Stobo, a former CEO of BT Funds Management, added.
Councils can now borrow overseas
The LGFA was created by Parliament passing the Local Government Borrowing Act in September. As well as establishing the LGFA, this legislation lifts a previous prohibition on local government bodies borrowing overseas.
The LGFA is 20% owned by the central government, with the remaining 80% initially held by 18 local councils including the Auckland Council, Christchurch City Council, Whangarei District Council, Western Bay of Plenty District Council, Tauranga City Council, Hamilton City Council, Wellington Regional Council, Wellington City Council, and Tasman District Council. Stobo said he expects more than 40 councils will join before year's end, just over half the country's 78 local authorities.
The government is providing a liquidity facility of up to NZ$1 billion through NZDMO, which will undertake the LGFA's funding and investing functions as well as serve as its sole swap counter party.
Aims to save money as council debt surges to more than NZ$11 billion
Local authority lobbyist Local Government New Zealand suggests a pooled funding approach will help local authorities borrow money at lower interest rates than they currently can, ultimately saving councils - and their rate payers - about NZ$25 million annually. Long-term council plans suggest local authority debt will more than double over the next five years to more than NZ$11 billion and councils say their debt funding options have previously been limited to the domestic banks, private placements and wholesale bond issues to domestic institutional investors and, to a lesser extent, retail bond issues to domestic retail investors.
International credit rating agencies Standard & Poor's and Fitch Ratings have both issued an AA+ long-term local currency rating for the LGFA, long-term foreign currency ratings of AA and Fitch a short-term foreign and local currency rating, used on the likes of commercial paper debt issues, of F1. The outlook on the long-term ratings is stable. See an explanation of credit ratings here.
Stobo said he was very happy with the credit ratings as the LGFA is the only other entity in New Zealand to carry ratings as strong as the Crown's.
Tenders open to local and overseas institutional investors; Retail investors may be offered LGFA debt via banks or KiwiSaver
The LGFA's tenders will be open to both local and foreign investors with the strongest interest, at least initially, expected from domestic institutional investors.
"People understand local authorities in New Zealand better than global guys because until now each individual local authority has been borrowing and the size of those borrowings, with the exception of Auckland City, has generally been so small in global terms that institutional investors offshore haven't bothered looking at the sector," said Stobo.
"But this agency model, which is already in place in Scandinavia and Canada, is well understood by global investors. I don't know if they will be strong supporters from day one, they'll probably want to observe the market for a little bit, but those that intend to be here for a long time may well want to take a large chunk initially because potentially it's attractive given what's going on in Europe and elsewhere."
The duration the LGFA debt is issued for will depend on what investors want, he added.
"Do they want three month commercial paper? Do they want three year bonds? I'm sure some councils would like 15 year debt tomorrow if they could get it," said Stobo. "So it's a question of trying to balance and develop the market and we're not necessarily going to have all the answers on day one. We're likely to explore things carefully and make sure we balance the needs of both groups (investors and councils)."
He expects LGFA debt to be available to retail investors through the likes of banks selling them parcels or through KiwiSaver funds.
Meanwhile, the new entity - which is currently seeking a chief financial officer to add to its CEO and office manager and aims to have a website up by the end of January - may put together a dealer panel of banks. If this happens and how it's structured was up to Combes, Stobo said, adding the members wouldn't be advisers per se as Combes "has the experience and relationships domestically and offshore to understand what investors want."
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16 Comments
The NZDMO issued NZ$150 million worth of bonds yesterday - http://www.nzdmo.govt.nz/securities/govtbonds/latestresults
Gareth - Does the legislation specify any limits for LG debt borrowing via the LGFA? Are international bond investors now shying away from US/UK/Euro Gov't debt and going for NZ Local Gov't debt as a safer alternative? I have no doubt that we will be getting future articles on interest.co.nz when this all blows up. Ratepayers of course will be the ones eventually re-paying all this debt.
Good question on limits Andy. I'm not sure but will see what I can find out. Here's the Act online - http://www.legislation.govt.nz/act/public/2011/0077/26.0/DLM3620704.html
Unfortunately the unintended outcome is likely to be greater idiotic council splurging and no reductions in rates for anyone.
The intent of the change was sound. That the banks et al would no longer be able to fleece ratepayers via councils on credit provided to be used in most cases to do necessary water and sewage facility work.
Sadly not all councils are prudent when it comes to money, indeed very very few. Most are rushing blind into idiotic ventures with the sole aim of buying the elected fools another few years in the money pot.
So sadly the future for this venture will be greater council waste. They will see the cheaper credit supply as an invitation to spend more. Central govt has failed to put in place any measures to control this local govt stupidity.
There will be a rush of credit blood to the head for most. Marlborough has its highrise carpark now used mostly by council to park council vehicles and each day it's mostly empty. A silly investment. Blenheims newest white Elephant. I doubt whether the ratepayers have finished paying off the replica Beehive idiotic council building dreamed up last century and forced onto locals.
Conclusion: Nice idea but seriously lacking in prudent credit management aimed at thrashing some real quality financial behaviour into local bodies. Considering the fact that such prudent behaviour is also sreiously lacking from those in the Beehive, it's foolish to expect it from the LGFA new game in town.
LGFA is a good idea. Think about it. Each local government now has the incentive to monitor and enforce fiscal prudence of the other local governments. E.g. CCC would prefer, say, Dunedin to be fiscally prudent as it benefits the credit rating of all local authorities, and also allows Christchurch potentially to claim more of a set amount of borrowed funds.
Previously, CCC would have prefered Dunedin to be fiscally lose, as CCC would have looked relatively better from a credit point of view.
It's the banks, large fund managers, and corporates that lose with the single issuer. They would generally prefer lots of different credits issuing as it provides different liquidity book investments. Banks also lose the opportunity to earn fat investment banking fees from special bond issues from individual banks.
Yes the banks et al lose heaps but you are in dreamland if you think councils will act prudently and monitor each others wasteful borrowing. Guess who will be on the list of lobby swine pushing idiot councils into more borrowing!....
It is a recipe for cheaper credit and amounts to a drug that councils will become hooked on.
It is also a nasty way to boost Keynesian make work madness at the local level.
So sit back in your armchair and watch the splurge surge.....and your rates rise....and the BS fly.
See that's where you go wrong AA....you presume the local bodies and indeed central govt in NZ run a tight financial ship...Austrian economics...as in Sweden and Germany...but this is not so...here in NZ the Keynesian splurge mentality dominates the brains of the wasteful central and local govt...the 'make work' mentality.
They do say that history never repeats , but that it does rhyme ....... so lest we forget , let's see if local councils in NZ can come up with something that's in tune with this ;
.
Orange County ......... 1994 ........ bankruptcy ........ Robert Citron ....... municipal bonds ........ 300 % leverage ....
Farce....utter total idiocy...who gives a shite...off to the LGFA for more dosh...$1,090,000 down the dunny is FA isn't it...give the bums a pay rise and a bonus....LG when you use borrowed money!
Auckland's "integrated" public transport cards, introduced in May with a $1 million marketing budget from the public purse, will have to be replaced because they are not compatible with a new system for trains, ferries and some bus companies.More than 93,000 electronic Hop cards, supplied by Snapper, are in use - but they work only on NZ Bus services.
NZ Bus and Snapper - which was beaten in 2009 by French electronics and military technology giant Thales to an $87 million supply and operating contract for an Auckland region-wide integrated ticketing scheme - are owned by Wellington-based investment company Infratil.
From the middle of this year, the Hop cards will have to be replaced at an undisclosed cost to Auckland Transport by upgraded versions suitable for all forms of public transport using the Thales system.......herald
The LGFA will not be subject to the Official Information Act 1982 (OIA), but nor will local authorities be able to use it to shield themselves from the operation of the OIA. If a local authority is entitled to access particular information as a result of a contract with the LGFA, that information will be treated as being held by that local authority (even if this is not physically/factually accurate) and will, therefore, be subject to the OIA.Read more
What do Mr Combes and his counterparty banks need to hide from the ratepayers charged with the responsibility to liquidate whatever liabilities are levied against them collectively or otherwise by the LGFA?
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