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Auckland Council wants to borrow in foreign currencies to cut its loan costs and gain longer term funding

Auckland Council wants to borrow in foreign currencies to cut its loan costs and gain longer term funding

By Gareth Vaughan

The new Auckland "Super City" Council wants to be able to borrow money in currencies other than the New Zealand dollar as it seeks longer-term funding in a move it estimates will ultimately save about NZ$10 million a year. The new council is expected to borrow an extra NZ$600 million in the next six years, making it the second biggest borrower in New Zealand after the central government.

The council's Draft Annual Plan for the 2011-2012 financial year and amendments to its Long-Term Plan, released yesterday,  set out how the council wants to amend its treasury management policy, developed for it by the Auckland Transition Agency, to give it the ability to borrow in currencies other than the New Zealand dollar. Local councils are currently only allowed to borrow in New Zealand dollars.

Auckland Council treasurer Mark Butcher told interest.co.nz the new council wanted the option to be able to raise loans overseas because the New Zealand domestic debt markets are small and limited in terms of their ability to lend money to borrowers for terms beyond seven years.

For the Auckland Council it would be "prudent" to borrow longer term to better match its NZ$30 billion worth of assets, many of which are infrastructure.

"What we do know is that by having the ability to go offshore we will get longer dated funding and also potentially a lower cost of funds too," Butcher said.

"We do calculate what the interest savings are going to be to the council. We've estimated it to be about 40 basis points of savings per annum, which equates to about NZ$10 million when you look at the long-term plan out to about 2018-19." (Or NZ$14.4 million per annum beyond the plan's horizon based on modelling done for the council by Cameron Partners and Asia Pacific Risk Management).

Any borrowings in foreign currencies would be on a fully hedged basis back to the New Zealand dollar to counter exchange rate risk. The council currently borrows from local retail and institutional investors and banks.

"It just gives us the flexibility to tap into those markets if we need to," said Butcher.

He said the council, which has an AA long term credit rating from Standard & Poor's, hadn't yet decided which offshore market(s) it might target.

"We're not starting at this stage to target Japan or Europe or anything like that. We'll just wait until the time comes around because these markets do change very quickly."

It might be 2012 before the council actually sought to raise any money overseas because before it could happen, legislation had to go through Parliament to create the Local Government Funding Agency (bond bank) and the Auckland Council needed to get an exemption from the Local Government Act. Then there's the council's public consultation and final council decisions.

2nd biggest borrower

The Auckland Council is expected to become the second biggest borrower in domestic capital markets after the Government. The council came into existence on November 1 last year replacing eight councils in the Auckland region, - 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.

The council has debt of NZ$3 billion which its long-term plan says is projected to swell to NZ$3.6 billion in the 2016/17 year. It has NZ$1.1 billion worth of new and refinanced debt projected for the 2011/12 year.

The council is seeking feedback on its draft annual plan, covering the year from July 1, by April 1. It has a prudential borrowing limit for net debt to total revenue of less than 175% and estimates its 2011-12 position will be 102%. It has set a net interest to total revenue limit of less than 15% and estimates it'll be at 6%, and a net interest to total rates limit of less than 25% and estimates it'll be at 11%.

The Auckland Council plans to spend NZ$1.8 billion on services and NZ$773 million on capital projects in the 2011-12 year. At 24%, or NZ$436 million, its "lifestyle and culture group" of activities accounts for the biggest slice of total operational expenditure. Transport accounts for NZ$368.3 million, or 48%, of capital expenditure.

The council plans to hike rates, what it terms the "transition rate", for 2011/12 from what the Auckland region's ratepayers' previously paid by 4.9%. Subsidiary Watercare also wants a 4.5% increase to the waste water rate from what will be collected in 2010/11. The Draft Annual Plan forecasts NZ$1.4 billion of rates revenue for 2011/12 and says the council has ratepayer equity of NZ$26.45 billion.

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14 Comments

Yeah right , John Key will be reaching for the Diaorreah tablets when he hears about this .

What  about the CURRENCY RISK? When the Kiwi dollar loses value, the debt rises exponentially , and we have to pay for this folly .

If we borrow in this unstable global market the debt MUST be denominated in NZ DOLLARS.  

These people must get real , the problem is some financial consultant will be punting this idea , and everyone who can make a quick buck from this will be encouraging these newly elected councillors to vote for it , like Turkeys voting for Christmas.

I hope Treasury blocks this stupid idea . 

Rather than "transition rate" they should call it "perdition rate".

 

 

Heres an idea...how about selling off some non core assets like the airport shares and Ports of Auckland.....oh thats right its not worth much now because you bureaucrats delisted it and wrecked it.

d"Local councils are currently only allowed to borrow in New Zealand dollars"

There isn't a chance in hell that the bums on the council seats in Auckland will get the right to intrude on Bollard's domain.

If they are that bloody thick they fail to understand the reason for the above control, then they ought to bugger off. 

...lol it was always going to be like that with the super city crap it's easy to spot the BS these days....I could have told Aucklanders for about a $10k fee nope not going to work...lol...it was obvious!

Quick go vote in the other guy in whoops that's right there all the same party with the same agenda.

Boatman, and others - they're not dumb, and they remind you of such in the article "Any borrowings in foreign currencies would be on a fully hedged basis back to the New Zealand dollar to counter exchange rate risk"

Why assume the worse about someone or an organisation when you know less about the subject than them, very clearly in this instance

They are doing exactly what the banking system does, they're accessing funding from overseas sources (in NZDs because they convert/hedge it immediately) at lower spreads (read less cost) than they would recieve from local lenders- makes total sense and as a rate payer we should be applauding them (not that its greatly innovative as it just commonsense and done all the time but those will the borrowing grunt)

Ah no its credit and if you are going to play the currency hedging game you better hope there choice of trader/broker is of a better calibre than those involved with the super city scheme.

What will happen is that Auckland council lol will have a massive loan + interest and then ping up go interest rates...Aucklanders will probably never be able to service the interest let alone the principle...

Que Bono?

As an ex-Corporate Banker , I fully understand how currency hedging and rate swaps  work . I also know the only winners in these transaction are the International  Banks or Merchant Banks who rape the client for upfront fees and then ongoing advisory fees.  After paying al the fees you might as well borrow the money domestically, and pay slighly more interest to New Zealanders

Big bonuses are paid for putting these deals together, so there are skewed incentives.     

I also know that funding Municipalities and Boroughs is a minefield. They enter into deals with all the best intentions in the world, and it often ends in tears,especially when the city fathers invest this supposed windfall in things like  grandiose railway schemes , that have massive expense over-runs , and lose money for ever.

We cannot rely on people without the skills and knowledge to enter complex financing arrangements with an uneven playing field and information assymetry.

Another thing to remember is that foreign bond yields are quite high right now due to sovereign debt crises all over the place, and the NZ goverment can still issue 5 and 10 year NZ$ denominated bonds at very low rates , almost always fully subscribed by the carry trade , so why complicate things with forex borrowings ?

Let Mrs Watanbe carry the currency risk .   

Remeber too , that a persausive, smart arsed, international Merchant Banking team will talk holes in the head of all those lefties on the council who will vote for the scheme.

John Key knows all this and he will stop it in its tracks

Sepheril - they just do an interest rate and currencyswap - a very vanilla transaction no doubt done through one of the banks, so unless we worry about Westpac or ANZ etc where's the concern ? i.e. they probably fix the interest rate at the same time, as they should

Im a independant private trader a small fish in a ocean of sharks and as Boatman lays out its far more complex than what your assuming and what i know in the mechanics of high finance.

But I stand buy what I say and you will pay, and the slug known as the super city will drag Auckland down.

All those incharge know this fact, they will be buying anything Auckland has left of value for cents on the dollar when this idea goes tits up....then charge you more to service the debt + interest on those same things, the super smart guys make there cash from fee's and back handers and the usual BS then split the scene real quick.

Thats how this game works.

These guys at the "to big to fail" institutions get bonus money in the millions from tax payers for major F#$% ups and or confidence schemes, what does a situation like that inform you of ?

Que Bono? lol I doubt it's the rate payer lol 

I'm with Boatman here: as an ex-currency trader :-) i know these guys will be paying handsomely for the hedging (incidentally hedging currency risk is not free.....you pay the carry).

If one wants to see where this could go check out the US Municipal Bond market. I hope Auckland rate payers are keeping a close eye on this. 

Agree theres always a fee!

This type of expenditure has grown exponentially since the Local Government Act 2002 heralded in the "Four Well Beings" : Culture, Environment, Social and Economic.

Prior to that local government was generally charged with managing the "three Ws" : Waste, Water and Wastewater.

Spot the difference. 

ctnz - why should that surprise you?

We have one of the biggest per-head private debts in the world, a Govt debt going backwards, and are still borrowing like this.

It's all 'lifestyle'.

We've just been living beyond our means - and failing to account the real things (GDP is humbug).

It's a collective failing.......

Just remember that the ability to repay diminishes with the supply of energy.

Days to the General Election: 20
See Party Policies here. Party Lists here.