Auckland Council seeks up to $200m in 10-year bond issue as Mayor Len Brown says 'we don’t have a blank cheque to fund Auckland’s growth'

Auckland Council seeks up to $200m in 10-year bond issue as Mayor Len Brown says 'we don’t have a blank cheque to fund Auckland’s growth'

Auckland Council is seeking up to $200 million through an issue of 10-year secured, unsubordinated retail bonds.

The SuperCity has outlined an indicative issue margin of between 80 basis points and 83 basis points over the 10-year semi annual mid swap rate, with the interest rate to be set this Friday March 14.

The offer also opens on Friday and closes a week later on March 21 with the bonds to be issued on Tuesday March 25. They're expected to be listed on the NZX debt market on March 26. Auckland Council is seeking $150 million plus oversubscriptions of up to $50 million. It says proceeds will be used for "general corporate purposes."

Investors must subscribe for a minimum of $5,000 worth of $1 bonds and multiples of $1,000 thereafter. Interest on the bonds will be paid twice a year with the bonds due to mature on Monday March 25, 2024. Joint lead managers are ANZ, BNZ and Westpac.

'Tough choices are ahead'

Details of the bond issue come on the same day Auckland Council starts reviewing its budgets and work plans for both the Council and its Council Controlled Organisations (COOs) over the next 12 months. In a statement Mayor Len Brown says tough choices are ahead with Auckland planning for "significant growth" over the next decade. Brown says Auckland’s Long-term Plan for 2012-2022 is reviewed by the Council every three years.

“With Auckland continuing to experience strong growth, we will need to work hard to strike a balance between investing in vital infrastructure, and keeping our rates and debt low and sustainable,” Brown says.

“Auckland’s AA credit rating is testament to the careful and responsible approach we have applied to financial management. But we don’t have a blank cheque to fund Auckland’s growth, and so we need to be clear about the priorities in the Auckland Plan, and prepared to make tough choices in some cases."

“We also need to take advantage of the scale that has been achieved through amalgamation. That’s why I want us to take a thorough look at the opportunities presented by public-private partnerships, alternative funding and commercial partnerships. The focus needs to be on providing higher quality services to Aucklanders, while transferring direct costs from ratepayers," Brown says.

The statement also quotes Councillor Penny Webster, who chairs the Council's Finance and Performance Committee, saying the review is an opportunity for all Councillors and local boards to have an in-depth examination of the budgets.

"I am confident we can continue to find savings and efficiencies, while making the investments we need to," says Webster.

"The Mayor said that as part of the review he would be asking the Council to look at three areas to more actively manage the growth of debt while providing for important investments in infrastructure, including: 1) Investigating alternative funding for transport projects such as tolls or a congestion charge 2) Continuing to make efficiency savings and reducing operating expenditure. The Council has already identified $1.7 billion in savings across the 10 year (Auckland) plan, but it is believed further savings can be found."

"(And) 3) Delaying lower priority capital projects to create room for more significant infrastructure projects to go ahead - which is likely to require some tough decisions from Council, Webster adds. More detail is available here.

Debt projected to double to more than $12 billion

As of December 31 last year Auckland Council had total borrowings of $6.1 billion with an average term to maturity of 6.3 years. Debt is forecast to grow to more than $12 billion by 2022. In the half-year to December 31 the Council had an operating surplus of $161 million. Revenue was $1.7 billion and expenses $1.5 billion of which $175 million stemmed from net finance expenses. Total assets stood at $37.4 billion.

Details of the bond issue are included in an investor presentation. The charts and information below are taken from the investor presentation. You can see more on Auckland Council's borrowing strategy and plans in this video interview with Treasurer Mark Butcher here.

 

 

 

 

Issuance strategy

1) Funding requirement projected to be NZD 1 billion per annum for 2014-2018 period

• Funding targets are against floating rate

• Preference for long dated funding to match long dated assets

• Diversify across markets to reduce reliance on domestic funding

2) Domestic Funding

• $4 billion retail debt programme established with future domestic issuance expected under this structure

• Existing wholesale issues and 5 NZDX listed retail issues to remain

• Improved liquidity by increasing existing tranche sizes and consolidation of existing maturities

• Local Government Funding Agency

3) Offshore funding

• Agnostic in terms of market or currency – but hedged back into NZD

• Preferred issue size is to a maximum of NZD 400 million

• Open to private placement under reverse enquiry

Credit rating

AA” long-term and “A-1+” short-term rating by S&P and “Aa2” by Moody’s. Both ratings affirmed in November 2013.

Two key risks to manage

• Ability to service existing debt - mitigated by rates certainty, expenditure control and hedging strategy

• Refinancing - mitigated by diversification of funding sources, bank standby facilities and investments

Operating budget is balanced every year and rates are reset on an annual basis to ensure balanced budget

• Debt Strategy Objectives

• Manage refinancing risk

• Lengthen maturity profile

• Reduce debt servicing costs

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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26 Comments

Len Brown, locked into growth.  What is intereting of course is how fast and much organisations look to externalise costs and problems, leaving them the "good news".  Reality Len wants to grow because he thinks it solve his costs/funding problems.   It doesnt, it just can kicks or pushed the costs onto someone(s) else.
Time to get real.
regards

“We also need to take advantage of the scale that has been achieved through amalgamation."
 
Cue Tui.

I'm really struggling to imagine where new efficiencies could lie. By now any procurement efficiencies (IT, energy etc) should already be locked in. Given that 80% of expenditure is contracted out it doesn't leave much to play with.
 
I have decided to vaingloriously proclaim Kumbel's Law: the bigger the council the less efficient it is. And this really comes down to the costs of co-ordinating 40 separate businesses located inside one giant office. Small councils take advantage of the "tea-room" effect. Auckland can't do that. Add to that the irresistible urge to create unnecessary jobs like Chief Economist and its just a dog's breakfast.
 
Any genuine cost savings will be offset by the endless silliness that happens inside big bureaucracies.

Nice law, Kumbel. Absolutely agree. It is impossible for parasitic organisations such as councils to become more efficient by getting bigger. Economies of Scale for councils as a concept actually works in reverse to the norm. The bigger they get, the more inefficient they become, spending ever-increasing amounts of rates and borrowings, whilst being less accountable or transparent or providing the same service levels. The only advocates for amalgamation are those that stand to benefit from such mergers. The bigger the council, the more inefficient it is. Yes indeed, to the point of a Chief Economist on the payroll and god knows how many underling economists in that team.
 

I second Kumbei's Law.  It wasn't until i worked at HSBC with it's (at the time) 350,000 employees, that i understood how the smaller banks could compete.  The bigger you are the longer and more expensive change programes are to implement.

Same with Fujitsu, ICL, and Unisys companies.

Because the company and team have to be coordinated across the whole operations, and a degree of left finger talking to right finger, massive infrastructure is needed.  Any localised changes or differences cause ripples in complexity.  You think it's tough updating your PC, and getting all your data across. multiply that by 1000 or 10,000 or 100,000's and it all has to be in a timeframe that doesn't interrupt the workflow (too much).
 Updating a procedure, means tracking through all the employees and updating them. Each failure means a forensic track through to find the failures and why it wasn't caught earlier.

Because a small failure can be amplified 100,000 times every thing is cross checked multiple times.  Document freshness becomes an issue!  More people are required to see that no mistakes are made.  Heirarchy must be implimented to ensure correct procedures and only current procedures are implimented.  All the managers and checkers must be consistant, policy must be written and checked to ensure this. Closed loops must be in place so that differences and failures can be noticed and corrected.  That means more people, more overheads.

Because of size and scope, local and agile solutions cannot be implimented. Due to complexity, individual specialisation cannot be allowed for (above near/neighbouring team level).

.... so they tell me industralisation and higher staff to maximise productivity on dairy farms is going to beat current cost models that have survived to be the backbone of NZ today.....

What sort of staff levels are you talking on dairy farms?  I'm sure things are managable without all these complexities if you are talking 20 staff.  At that level you can just manage things informally.

Still big differencs between 1 - 3.  and 4 and 8.
Especially given the level of responsibility that the government is handing out now

What sort of staff levels are you talking on dairy farms?  I'm sure things are managable without all these complexities if you are talking 20 staff.  At that level you can just manage things informally.

What sort of staff levels are you talking on dairy farms?  I'm sure things are managable without all these complexities if you are talking 20 staff.  At that level you can just manage things informally.

Racing commentary anyone?

....and it's Len Brown by a nose, a really long nose....

Not happy .
The infrastructure  development of the city needs to be sensible and the user-pays principle is of utmost importance .If it does not pay its way , it should not see the light of day .
Stupid things like the rail loop is a monumental waste of ratepayers money for something that about 99% of Aucklanders will never use , but people in Rodney will have to pay for.
Instead of hocking us to the hilt , why not commercialise and part- privatise Ports- of -Auckland ?
The "assets " of $37.4 Billion is a red herring of Guiness Book of records magnitude . 
Most of these so called  ' assets"  generate no money at all , nothing , so they are really liabilities in that they cost money in  maintenance , etc.
A park, for example ,  is NOT an asset., its a public amenity , and its delusional to call it anything else  
As is a Museum , a library , a community centre , public pool, the waterfront , and the like , all of these are amenities , not assets   
The real return on things like Ports -Of Auckland are so poor , I dont know why we dont re-privatise them
 

Boatman what succesful user pays city should we model off?
I can think of a lot that don't use users pays. Singapore, Helsinki, Amsterdam, Houston......

Do you think we should abandon local road building and maintenance in Rodney because 90% of aucklanders will never use them?

I saw tthis argument coming , but rationlised it because the train tunnel up Queen street is going to he an unsustainably expensive and underutilised project versus the alternatives .
Rodneys roads are like any other road anywhere in NZ and are used by numerous people daily .
Train travel is not as efficient as bus travel , its limited to the track , its maintenance cost is too high , and the city population is too low .
The capital and trunning cost /kilomtere is simply not vialbe for Auckland

Rail operating costs are lower.  Especially after the electiric trains are in. One driver per almost thousand passangers. 
One tunnel will transform the entire network with regular service, i.e. every 5 mins, possible from Waitakere to Pukekohe.
Roads won't have space for any more busses by the time the rail link is finished, unless we introduce road pricing to get more cars off the road during the peak hours.
Not sure how you expect people to get around the city in 2025?  Driving on congested roads at 7km/hour?  Doesn't sound productive.

Um, let's see what you've forgotten to include in Opex:

  • Interest on capital employed.  At rail costs north of $100m/km, WACC at say 7-8%, that's $7-8m/km alone annually
  • Depreciation - that will have a long useable life but even allowing a 75 year spread based solely on historic asset cost, that's another $1.3m/km annually

So in these two items alone, there's the thick end of $10m/km/annum, using Generally Accepted Accounting Practice.
 
Doesn't sound like such a cheap option any more, eh?

as opposed to the roads in rodney which don't require money to build?  Whats the cost per passanger km on those?  Or double decking the northern motorway and second harbour crosssing, those are real cheap to build and maintain.  And at a time when vehicle kms travelled are falling, it's a great investment.

BTW, where do you get $100m/km from?  We built a  new 2.5km branch line + station for $50M a couple years ago.

And we are currently building 4.8km of new motorway at a cost of $291m/km

Public Private Partnerships just hide the debt off balance sheet.  It's still there and still needs to be paid by ratepayers.  Infact it's worse as PPPs borrow at higher rates than local government and so the interest on debt that must be paid by ratepayers is higher.
PPPs can make sense if they take some of the risk, but the way PPPs are structured these days, like transmission gully, the tax payers take all the risk, so what is the point?  It's just a handout of public money to the private sector.

Yes they should just put the project up for public tender. Probably same private sector involvement but more open and transparent. Of course that would involve public debt and the public has been wrongly educated that long term debt should not fund long term assets....
 
We are so confused here in NZ. No wonder we are still stuck making milk powder while others make smart phones and lifts that will take you to the top of the highest building in the country....

Agree completely.
 
The only way I could see it working is if the private operator is given a finite period to make their money back through user charges as well as pay the cost of capital and operating costs. The assets would then have to be vested at no charge to the council. So road users would have to pay through the nose to drive these toll roads but there would be no impact on the general rayepayer. Economically, if those road users value being able to use that road highly enough to pay the toll so be it.
 
Unfortunately there is still the default risk in that the council would be expected to take over the road if the private partner went belly up.
 
So I can't see any formula for free money.
 
 

''SUPERCITY LOOKS FOR SAVINGS & EFFICIENCIES''  add that one to the Tui Billboard !

How many bods in Auckland council are earning over 100K and 200K..  ???  Now that's where your rates go to.  I am so glad I don't own a house in Auckland anymore.