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How and why the Auckland Council plans to borrow NZ$14 bln on behalf of its ratepayers over the next decade
By Gareth Vaughan
As recently as last year New Zealand local authorities weren't allowed to borrow money overseas. But Parliament changed that and the Auckland Council "Super City" is at the forefront of moves by local government to tap offshore borrowings, with Auckland Council Treasurer Mark Butcher saying given the massive size of Auckland's investment programme, the Council simply has to diversify its borrowing overseas.
In a Double Shot interview Butcher told interest.co.nz Auckland Council group current debt of close to NZ$5 billion is forecast to rise to a peak of NZ$12.5 billion over the next decade.
"That NZ$5 billion portfolio needs to be refinanced. So our total borrowing across the group is about NZ$14 billion over the next 10 years so it’s about NZ$1.4 billion borrowing requirement year in year out," Butcher said.
Because of the sheer scale of the Super City, established on November 1, 2010 through the amalgamation of eight Auckland councils - the Auckland Regional Council, Auckland City Council, Franklin District, Manukau City Council, North Shore City Council, Papakura District Council, Rodney District Council and Waitakere City Council - Butcher said the move away from sourcing 100% of borrowing domestically over the past year had to happen.
Aside from domestic borrowing, such as through last week's NZ$125 million six-year retail bond offer, Auckland Council now also borrows through the Local Government Funding Agency (LGFA), and via an overseas borrowing programme, the first from a New Zealand local authority, which has an upper limit of US$2.5 billion and the potential to list debt on the Singapore Exchange.
"A year ago we were funding 100% domestically. We didn’t have the LGFA, we didn’t have the ability to fund in foreign currency (which is done on a fully currency hedged basis). We had a historical reliance on domestic funding – retail and wholesale – but what we’ve realised, over the past two years now, is that we can’t rely fully on those domestic investors," Butcher said.
"We are the largest borrower in New Zealand after the central government, after the four major banks and shortly after the LGFA. So we really need to diversify funding sources, lengthen the term of our debt too, and diversify the investor base as we go through this large investment programme in Auckland which is debt funded."
Three way split
Over time the plan is for the Auckland Council's borrowing to be one-third domestic, one-third through the LGFA, and a third from offshore funding.
"So domestic funding is important to us still. The cheapest borrowing cost in the world is to fund domestically or through the Local Government Funding Agency, but it's really important to diversify," Butcher added.
He said all Auckland Council's domestic debt issuance was now likely to be via its retail bond programme.
"We really want to grow that, we want to have those debt issues listed on the NZX. Currently we’ve got about 15,000 investors of which 14,800 are retail, the other 200 are banks, institutional investors and offshore."
Last week's inaugural issue saw stronger than expected interest from retail "ma and pa" investors, even though the interest rate they're receiving is only 4.41% per annum, Butcher said. Auckland Council had "deliberately accepted" all the retail interest and had about NZ$270 million worth of bids in total for the NZ$125 million worth of bonds issued.
"We took the strategic view that this is the first issue under the new programme (so) we’ve got to show our intent that whenever we can get retail investor involvement we should actually take that," said Butcher.
"So it was a great outcome, it was better than we expected. Interest rates are low, we have all this feedback that retail investors don’t want to take something with a yield of 4.41% on it, so we were pleasantly surprised by it."
Has borrowed NZ$525 mln through the LGFA
Meanwhile, Auckland Council has participated in seven of the eight bond tenders run by the LGFA thus far, borrowing about NZ$525 million.
"We are the largest (LGFA) borrower, we’re currently about 40% of their total assets, or total lending," Butcher said.
When it comes to borrowing in its own name the Auckland Council will aim to steer clear of the LGFA bond maturity dates, and take a "real co-operative stance."
"We’ll continue to be a really active supporter of the LGFA, not only to assist us, but also obviously to assist the sector. In terms of volume I think we’ve done about NZ$525 million of funding through the LGFA," he said
The LGFA was created by Parliament passing the Local Government Borrowing Act in September 2011. As well as establishing the LGFA, this legislation lifted a previous prohibition on local government bodies borrowing overseas.
The LGFA is 20% owned by the central government, with the remaining 80% held by 30 local council shareholders, of which the Auckland Council is one. See the full list of LGFA council shareholders here.
So far NZ$200 mln borrowed overseas, from Japanese investors
Auckland Council's offshore borrowing programme, put in place late last year, had its first debt issuance in February. To date the Council has raised about NZ$200 million through it, which Butcher said was primarily from Japanese investors in Australian dollars over a 10 year term.
"The Japanese life insurance companies like the credit story, like the yield, like the diversification to this end of the world. So we’ve had a really good response out of Japan. We’ve just recently been through Switzerland and are getting a similar response from them as well too," said Butcher.
Offshore funding was set to become a critical means of raising funding, getting a diversified investor base, and lengthening the tenor of council borrowings.
Butcher said Auckland Council could only borrow money to fund new investment - capital expenditure - or to roll over existing debt.
"What that means is when the councillors under the Long-Term Plan determine the amount of investment in the region, both new investment and renewals, that then dictates how much we have to borrow," he said. "Under the Local Government Act we have to act prudently and run a balanced budget."
The Long-Term Plan forecasts rates revenue will rise from NZ$1.39 billion this year to NZ$2.35 billion in 2022.
Auckland Mayor Len Brown says investment planned over the next decade includes sinking NZ$5.3 billion into upgrading and renewing roads and footpaths, spending NZ$2.4 billion on bus and ferry services, and splashing out NZ$115.4 million on walking and cycling projects. The multi-billion dollar City Rail Link proposal, which needs but doesn't yet have central government backing, is the "most important transformational project", according to Brown.
11c in the rates dollar paid in interest, doubling to 22c in the dollar over 10 years
Currently for every dollar of rates Auckland Council collects, it pays 11 cents out on interest. With NZ$14 billion worth of borrowing forecast over the next decade, this will increase to about 22 cents in every dollar, Butcher said.
Asked about concerns some ratepayers would have about such a big increase in debt, Butcher said the value of the Council's assets was forecast to rise by significantly more than its borrowing. Auckland Council's about NZ$36 billion worth of assets are forecast to increase in value to about NZ$58 billion in 10 years.
"So debt increases by NZ$7.5 billion, assets increase by NZ$22.5 billion. So therefore equity from a ratepayers point of view increases from about NZ$29 billion to NZ$42 billion. That increase occurs because obviously we’ve got government contributions in terms of transport and capital expenditure, we’ve got inflation in terms of assets increasing in value, you’ve also got the private sector coming in as well too."
'Prudent' level of debt
Butcher said although the Auckland Council's borrowing plans amount to 'big numbers", the region it's funding is big too.
"It’s a third of New Zealand’s population, it’s 37% of national Gross Domestic Product (GDP). Over the next 30 years the population increases by 60% from 1.5 million to 2.4 million, (and) as a percentage of national statistics we get to over 40% of population, 40% of GDP. So if you don’t do this investment, you don’t borrow, not only is Auckland going to not go forward, the rest of the country’s not going to go forward either," Butcher said.
"The credit rating agencies (Standard & Poor's and Moody's) have looked at our debt projections, they’ve kept our credit rating unchanged at AA and Aa2. The Auditor General, Audit New Zealand have looked at it and consider it to be prudent levels of debt."
In a world of credit rating downgrades, every week you hear of further downgrades, for us to maintain our credit rating from independent sources would also suggest that they are looking at it and suggesting that we can also service that debt and refinance that debt as well too."
Under investment in infrastructure in Auckland in the past threatens to hold the region back, Butcher suggests.
"And if we want Auckland to grow then we’ve just got to do this."
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