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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