New Local Govt Funding Agency to borrow first money in mid-February; Plans to borrow about NZ$1 bln this year

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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