Auckland Council borrows NZ$300m through 15-year Norwegian bond, takes offshore borrowing to NZ$819m

Auckland Council borrows NZ$300m through 15-year Norwegian bond, takes offshore borrowing to NZ$819m
Auckland Council has issued bonds in Norway, well known for its fiords. Image sourced from Shutterstock.com

By Gareth Vaughan

The Auckland Council has borrowed 1.4 billion Norwegian krone, (about NZ$300 million), through a 15 year bond issued to Norwegian institutional investors, which lifts its offshore borrowing to date to roughly NZ$819 million.

Mark Butcher, Auckland Council's Treasurer, told interest.co.nz the Norwegian bond issue stemmed from "reverse inquiry" to the Council via HSBC.

"We were approached by HSBC, which is one of our banks, saying they had some Norwegians interested in the Council name, in the Council credit, and would we be keen to issue to them," Butcher said.

"So it wasn't solicited, it wasn't a public deal."

Butcher said the investors, who he declined to name, would receive annual interest of 4% in the Norwegian krone.

He said a price to the Council for the Norwegian borrowing of about 113 basis points over the 90 day bank bill rate was about right, although there were "a few extra costs on top of that."

The Council hedges its currency risk and swaps money borrowed overseas into New Zealand dollars.

"(So) it doesn't matter if we're issuing in Australian dollars with a 5.5% coupon, or a Norwegian market with a 4%, or a Swiss market with a 1.1%. It's all about what it comes back at after all the exchange rate has been hedged out, after all the swap has been done into New Zealand dollars. It would if you weren't hedging the currency risk, but because we do, it becomes irrelevant," said Butcher.

Of the Norwegian bond he said; "It came back here in line with our domestic funding levels."

"For us it's a great transaction. Transpower borrowed in Australian dollars for 10 years (recently) and they were around 145 over for only a 10 year. So we were 30 odd basis points tighter and for a longer term," Butcher added.

The Council had done one 15 year bond issue previously, domestically, raising NZ$100 million about two years ago with a wider spread over swap than the Norwegian deal was priced at. Butcher wasn't aware of any other New Zealand entity having issued bonds in Norway.

"Norway's a bit like Switzerland and Japan, they're a major savings centre," said Butcher.

Three borrowing options

The Auckland Council is able to borrow domestically, such as through a NZ$125 million, six year retail bond issue last December that's paying investors 4.41%, through the Local Government Funding Agency (LGFA), and through its offshore borrowing programme. The latter, the first from a New Zealand local authority, has an upper limit of US$2.5 billion. It also has the option of listing debt and the Council's Norwegian bond is listed on the Singapore Exchange.

The Auckland Council "Super City" was 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 other offshore borrowing to date includes two retail issues to Swiss investors earlier this year, one in January and one in May. Both for durations of 11 years, they raised CHF100 million each, about NZ$256 million in total, and are paying 1.125%. They have Swiss market listings.

The Council's also issued 10 year Australian dollar denominated bonds to Japanese investors, which aren't listed and raised about NZ$263 million. This puts the Council's total offshore borrowing to date at about NZ$819 million.

Butcher said terms of 10, 11 years and 15 years for the bonds was good because the Council's assets are 50 years or 100 years long.

"We're never going to get our debt out that far, but it certainly is prudent from a borrower to lengthen a little bit longer. Then you avoid all the refinancing risk if you have everything borrowed, two, three, five years. So by getting out a fair chunk longer it makes it less risky and easier to manage."

The Council needs to borrow money from overseas to lengthen the term of its debt, and diversify its borrowing sources because it can't borrow all it needs from the domestic market, Butcher said.

Has borrowed NZ$860 mln through the LGFA

Since the LGFA's February 2012 launch the Auckland Council has borrowed NZ$860 million through the local government "bond bank", Butcher added.

The Council was unlikely to borrow any more money for another couple of months, Butcher said, but there was still a big borrowing programme ahead.

"I think across the group in the next 12 months it's about NZ$1.9 billion to borrow. About half that is refinancing existing debt, and obviously we've got a large capital expenditure programme to finance. We'll be borrowing offshore, by LGFA and doing some domestic issuance," said Butcher.

 The Auckland Council Group’s net debt at 30 June was NZ$5.5 billion. Total debt was NZ$5.9 billion. The Council's Long-Term Plan suggests this will increase to reach a peak of NZ$12.5 billion in 2021/2022. Standard & Poor's has an AA credit rating on the Council and Moody's Aa2.

See more on Auckland Council's borrowing strategy in this Double Shot interview with Butcher from last December. And there's more information at the Council's investor centre.

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38 Comments

Conincidence? Other news just in...
https://www.google.co.nz/search?q=imf+norway+bubble#q=imf+norway+bubble&tbm=nws
Norway has one of the biggest housing bubbles in the world with prices overvalued by up to 40 per cent, according to the International Monetary Fund, putting pressure on the favourite to win the country’s upcoming election.
In its latest assessment of the oil-rich Nordic country, the IMF increased its estimate of how much Norwegian house prices are overvalued from 15-20 per cent in its previous report in 2011.
IMF Report
http://www.imf.org/external/pubs/ft/scr/2013/cr13272.pdf
Check out the price the rent ratio graph on page 11. New Zealand takes bronze at about 160% of the 20+ year average. Norway and Belgium beat us. 

"IMF Report
http://www.imf.org/external/pubs/ft/scr/2013/cr13272.pdf
Check out the price the rent ratio graph on page 11. New Zealand takes bronze at about 160% of the 20+ year average. Norway and Belgium beat us."
I hear a lot of talk among the younger people I work with about not buying but renting....
Good idea I say.....30 yrs of falling interest rates have favoured capital values but now....?
Of course that kind of talk is sacrilege. 
Cheers.

All sounds very dodgy to me. The swaps are only as good as the counterparties, whoever they are, will they still be in business in 5 years time? AIG, Lehman, Bear Stearns, RBS, Northern Rock etc etc. As you say, pushes up the NZD which is good for low interest rates and high house prices. Wait a minute, there's a connection there. Silly sods. Why not just sell the bonds to kiwis and pay the going rate without incurring unknowable risks.

Zany, and Roger,
No wonder there is continuos upward pressure on the NZD. 
Couldn't agree more. In my view when the NZD is overvalued- roughly measured by when we have a current account deficit- NZ government or quasi government (including local government) debt should ideally be managed internally, with assistance if necessary from the RBNZ. Otherwise the effects are self defeating- yet more uncompetitive trading industries, and an ever increasing current account deficit.
Roger, the risk of the other party failing seems minor to me, as long as we don't end up with the risk of paying back Norwegian Krone, and I don't think we would. Is the risk you see that suddenly there is a call on billions of NZD? The exchange rate effect is the thing that gets me. Self defeating.
It doesn't seem our Treasury have connected those fairly simple to connect dots.
 

It's not so much the risk I see as the risk that no one sees. Exposing the Auckland ratepayers to unnecessary risk seems stupid to me. All this "It's perfectly safe, we have insurance ( ie swaps) for that" just doesn't cut it to me. Maybe you have, maybe you haven't, you cannot know.

Also, the insurance may not pay out and it might not have covered the right risks. All you know is that you have paid a premium. Think Credit Default Swaps on Greek bonds, or what would have happened if AIG was not bailed out.

Is it wise for Auckland to borrow offshore?
Here's what happens to cities that become indebted under the Wall St / Too Big to Fail Banking industry:
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/07/18/detroit-isnt-...
 
http://www.wnd.com/2013/08/why-our-cities-are-self-destructing/
 

Also, the insurance may not pay out and it might not have covered the right risks. All you know is that you have paid a premium. Think Credit Default Swaps on Greek bonds, or what would have happened if AIG was not bailed out.

Double post in the wrong place, sorry.

Insurance is becoming one interesting subject.  One clear trend, you have insurance but the insurance wont pay out often on a pretext like you missed telling them something relevant, like you fart twice a day. In the USA I think 75% of ppl going bankrupt over medical fess paid for cover but it was then declined.  Look at Chch, both AMI almost going to the wall and the difficulty in payouts...what an eye opener these 3 have been, or the ECQ, almost wiped out financially...
Then yes there is the so called CDCs, absolutely crazy....
In some cases SCAM,  is all I can think of.
regards

Christchurch will go down in the annals of new zealand history as the place time forgot. The performance of all those who had in their hands the power to fix have turned a blind eye. The behaviour of the insurance companies especially has been both fraudulent and criminal, with the tacit approval of the government. And they will get away with it. It will be forgotten in the mists of time.

Yes, but I think the govn is caught between a rock and a hard place. 
regards

HSBC has admited to money laundering  for drug gangs in Mexico. 
But seriously HSBC went to the council and offered them this great deal that is really good of them. And wasn't it lucky that the Norwegians had all that monet to lend!
This will be a marker for the end of New Zealand as we know it. It is pure, simple utter  madness to borrow in a foreign currency.
The council is borrowing ofshore to build a new library in Devonport that the people of Devonport do not seem to want nor need.
 

Plan B - if you think the council borrowing fully hedgted is a worry for NZ, then you must be really worried about the multiple of multiples the NZ banks are borrowing in comparison fully hedged from overseas, or do you have the wrong end of the stick here  ?

Im worried about councils borrowing...yes, such borrowing leaves the rate payer on the hook, very clearly.  Banks, yes as we are in such a huge bubble at least x2. Implicitly the tax payer is on the hook for that and looking at Ireland we see 20 years if not 30 years of debt misery ahead and they had the EU to borrow off...I dont see us having that borrowing depth...the IMF is our port of call, if by then the IMF is still viable....and I really doubt that...
regards
 

I am not really sure what end of the stick I have. Mark Butcher, Auckland Council's Treasurer, sounds like a really clever guy, is he as clever as the guys from HSBC who found the Norwegians who just happened to want to buy some Auckland City Council debt. The unamed Norwegians worry me. These are some people with 300m to throw at Auckland and they have no name. That is a worry. Having a deal arranged by HSBC is a worry. People throwing around hedging like it means something is a worry. The debt is for 15 years. That is 15 years without something really bad happening. The whole thing sounds like something that has been cooked up to relieve us of our money. The krone would have to be exchanged for USD and then exchanged to NZD so that would be two lots of hedging what fun. Also what is "reverse inquiry" anyone who could say such a thing and keep a straight face should be subject to constant adult supervision. The council seems to have borrowed a lot of other peoples money. This will probably not end well. And all of the hedging in the world will not help when the shit hits the fan.
 

Its always a question of degree I guess Steven, but I'm not sure about the extend of the Auckland council's borrowings but infrastructure spending arguable does require future generations to pay for it as well. With banks, their reliance upon offseas funding is falling, which is encouraging, but still too high, although the trend is good. But without it at the moment, NZ can not self fund and consequences for the economy, housing, businesses etc would be decidely unattractive in the short-term. 

Plan B. I think your intuition is correct.
There is an awful lot of "hot" money sloshing around the world on the back of both the Russian and Chinese " Capitalist Experiments.
The way Capitalism and the large Financial Institutions have been hi-jacked by Wall Street and the "too Big to Fail" banks and their greedy, connected CEOs,  has no doubt had an effect on both Russia and China.
We need to be wary that the "Norwegian" investment isn't sourced by the same type of short-term money launderers as the ones JK has the "Welcoming Red Carpet" out for at Sky City.
Fifteen years goes by pretty quickly in the life of a city, but I would certainly want to know the background of such a sizeable loan.
Without good investigative sources, it's difficult to find out much of real interest,  and with the passing of the GCSB Bill, Joe Public is going to be completely stymied in terms of investigating resources that have enough privacy to facilitate any useful material.
Just hope the City "fathers" have the welfare of the citizens in their hearts, and have enough experience, intuition and skill to make the right decisions.

"My advice to people dealing with the financial sector is: never buy anything that's complex. Because the more complexity the more opportunities there are to screw you over. I just can't get my mind around how banks can still call clients in the corporate world and say, look we've got this great idea that's going to make you a lot of money. I mean, what are they thinking? Nobody in the City can be trusted because they don't work for you, they work for themselves.
 
http://www.theguardian.com/commentisfree/2013/aug/01/most-dishonest-bank...

But there's nothing unduly complex in what the council's doing here though Plan B, its just pretty standard stuff in markets. Its a case of reverse enquiry (could be a Norwegean pension fund for all we know looking for a better yield) that suits the council in terms of margin or maturity, probably both. And who cares particularly who it is, the council's the one getting the money. 

More to the point.
 
The Council needs to borrow money from overseas to lengthen the term of its debt, and diversify its borrowing sources because it can't borrow all it needs from the domestic market, Butcher said.
 
Mr Butcher needs to address the declared local funding deficiency. If NZer's cannot meet Auckland's funding needs, surely we are unable to service and extinguish maturing foreign debts without compounding the liabilities further down the track.    

Stephen I suspect he means he can't borrow all its needs at acceptable margins, hence his needs to diversify the council's funding sources. Makes sense me, the local market is small and has a limited appetite 

Looks like Stephen's comment went completely over your head Grant.

Grant A, Mr Butcher may not be able to borrow any of his needs locally, given the poor showing at yesterday's LGFA tender, hence my conclusions are not in dispute. Read more
 
Returning to NZ, yesterday’s Local Government Funding Agency (LGFA) tender once again attracted fairly tepid demand. This resulted in spreads to NZGBs being marked wider. Bid to cover ratios ranged from 1.6x to 3.0x. Successful bid ranges remained fairly wide at 3-10bps.

Ctnz - no I can't so go ask that of Mark Butcher, he's the guy most skilled to make such assessment. The fact that you and probably many others on here don't know the answer suggests they should go find out the facts rather than assume its all bad 

Missed the point of CTNZ as well Grant.

Second thought KH, dont, another ignorant comment from you that's not worth corresponding with.

Your last paragraph says it all about you ctnz, do you really think someone is going to bother trolling interest.co.nz with some agenda to convince a small minority of people of about something.  I was making no comment about the extent of debt, or the difference between foreign or local, all I was saying was that if someone is going to borrow theyre best to use the cheapest source, all other things equal, and whats the paranoia about FX swaps, a pretty basic tool to hedge currency risk

Your last paragraph says it all about you ctnz, do you really think someone is going to bother trolling interest.co.nz with some agenda to convince a small minority of people of about something.  I was making no comment about the extent of debt, or the difference between foreign or local, all I was saying was that if someone is going to borrow theyre best to use the cheapest source, all other things equal, and whats the paranoia about FX swaps, a pretty basic tool to hedge currency risk

Grant A.  I see you as somebody with a lot of expertise with what you do.  But not aware of any bigger picutre.  It's like you are parked over some screen,dealing with complex issues, but don't realise you have set up in the fast land of some financial service motorway.   And there are a lot of fast trucks.
Any suggestion to you is met with 'thats irrelevent".   mmmmmh.  Trucks coming Grant.
As for the troll.  I don't ask you to identify yourself in any way at all.  But what is your role in life and banking and or some pr agency.  Given you only show up when there is a questioning of banks, and then emerge aggressively giving one message only.  Are you paid to do this.  Seems you need to enlighten us, otherwise that is the obvious conclusion.

Excellent extrat ctnz.  But how do we get it across to the gnomes.   Given their limited view.  Defeats me.

It's not rocket science KH - but since you know it all please explain exactly to me what was being stated since you have raised it 

Knowledge of the narrow mechanisms does not help you in seeing the bigger picture.  "If NZer's cannot meet Auckland's funding needs, surely we are unable to service and extinguish maturing foreign debts without compounding the liabilities further down the track."  

Nice comment from etnz.

Grant A.  I see you as somebody with a lot of expertise with what you do.  But not aware of any bigger picutre.  It's like you are parked over some screen,dealing with complex issues, but don't realise you have set up in the fast land of some financial service motorway.   And there are a lot of fast trucks.
Any suggestion to you is met with 'thats irrelevent".   mmmmmh.  Trucks coming Grant.
As for the troll.  I don't ask you to identify yourself in any way at all.  But what is your role in life and banking and or some pr agency.  Given you only show up when there is a questioning of banks, and then emerge aggressively giving one message only.  Are you paid to do this.  Seems you need to enlighten us, otherwise that is the obvious conclusion.

In the short life of the inaugural Auckland Council, debt levels have soared.
The council's borrowings will increase from $5.5 billion to $6.7 billion in the current 2013/14 financial year. That's an increase of $1.2 billion in just 12 months, which is over $3 million a day. At the same time the cost of interest payments is forecast at $367 million, which is just over $1 million a day. These are huge numbers.
 
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11121876

Yup worked for a bank so no surprise that when I see stuff thats populist and just plain wrong, I'll sometimes bother to defend it. Others of the same ilk obviously don't bother and increasingly I'm probably going to go that way too which will make the conversation completely convincing to those in it.