A NEW bond bank designed to cut council borrowing costs is confident it will arrange at least $1 billion of debt in its first year, after being given the same credit rating as the Government.
The new Local Government Funding Authority (LGFA) has been awarded an AA+ credit rating by both Fitch and Standard & Poor’s, on a par with the sovereign rating, and stronger than any of the banks operating in New Zealand.
The LGFA is owned by 18 councils, including Wellington City and Greater Wellington, and will try to access cheaper debt through collective scale and strength.
As a “borrowing agent” rather than a bank, the LGFA will use the back office expertise of the New Zealand Debt Management Office, which arranges debt for the Government. LGFA has poached Philip Combes, head of the DMO, as its chief executive.
The 79 local and regional councils currently hold debt of $5b and are projected to increase borrowings to $11b over the next decade, based on long-term plans.
The LGFA will borrow in bulk, allocating debt to councils on a sliding rate based on scale and credit rating. A small margin will be withheld to cover operating costs and pay a dividend to shareholder councils, which provided seed funding.
Craig Stobo, the senior banker who is chairman of the LGFA, said the top rating should allow it to borrow money at a similar rate to the Government.
“There are only two AA+ rated entities in New Zealand now – The New Zealand Government and us – so we are very, very attractive [to lenders]. So I expect that margin to be quite tight against the New Zealand Government, and increasingly tight over time as we get some volume and liquidity.”
Stobo said he expected the LGFA to lend “at least” $1b in the first year, and to eventually become the second largest borrower in the country, after central government. Many local councils have committed to directing large chunks of borrowing through its books.
“The majority are committing 80 percent [of borrowing] through us”, although Auckland had so far committed only 30 percent, while some councils had committed a set dollar amount.
“Those committments guarantee scale for us, which means we can achieve the objectives. Without the commitments we can’t achieve scale and can’t drive down margins.” Stobo said.
Some councils, notably Dunedin, elected not to take part in thhe LGFA because of concerns the council wold be exposed to the risk of a default.
Over the next two weeks the LGFA will carry out an extensive roadshow to drum up interest from institutional investors and quiz councils on the length of debt they want.
Combes, who will head the new Wellington head office from January, would not be drawn on targets for the LGFA, although he said the difference in yield between the DMO debt and LGFA debt would be a “key measure” of success.
Promoters of the LGFA have suggested it could save councils 40 basis points (0.4 percent) of interest on debt. Combes said the figure was “fully realistic over time”.
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