By Roger J Kerr
My firm Asia-Pacific Risk Management is a prominent debt and interest rate advisor in the local government sector.
As many readers will be aware, we have been working with Cameron Partners for Local Government New Zealand to set up a centralised debt issuance vehicle - a bond bank - with the objective to reduce the credit margin councils pay above market base rates on their debt borrowing.
The formation of the Local Government Funding Agency - the LGFA - is well down the path with recent press releases from the Minister of Finance and Minister of Local Government confirming that legislation will be passed this year to establish the new agency.
The initiative and plan is already having an impact in the local government debt marketplace with credit spreads reducing by up to 0.50% over the last six months as institutional investors, intermediary banks and debt issuers all realise that the new vehicle will command a strong credit rating and will fund from offshore debt markets as well as the local market.
Investor demand has chased Council credit spreads down in the primary and secondary debt markets as they realise there will be a shortage of these quality fixed interest securities in the future when the LGFA is operating.
Council credit margins have reduced by 0.50% despite general corporate 'AA' and 'A' rated securities not really decreasing at all over the same six-month period (see charts below).
The market rules ...
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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