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NZ local councils anticipate lower borrowing costs after joining funding body

Friday 9th December 2011

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New Zealand’s local bodies are crunching the numbers on the savings they expect in lower borrowing costs by teaming up in the Local Government Funding Agency, which will sell bonds on their behalf starting in February.

Christchurch City Council estimates it could achieve savings of up to $2.2 million in the first year if it were to refinance all of its $576 million debt with the LGFA, said Paul Anderson, the city’s general manager of corporate services.

“The council will save money on interest payments by being part of this agency,” he said.

Hastings mayor and Local Government New Zealand president Lawrence Yule said cheaper borrowing costs will free up funds for his city.

“Hastings has about $50 million of debt,” Yule said. “If we where to refine it by even 50 bases points that would be quarter of a million dollars in interest, which could be pumped into infrastructure, water and bridges.”

Local authority debt is forecast to more-than double debt on issue to $11 billion in the next decade from about $5 billion now. The number of councils as members is expected to jump to 40 from 18. That would make it the second-biggest non-bank bond issuer after the government, said Craig Stobo, LGFA’s chairman.

The councils own 80 percent of LGFA and central government owns the balance. The authority gives councils the ability for the first time to borrow offshore, allowing them to tap markets with interest rates are lower. Auckland City, which is one of the members, can also borrow overseas in its own right because of its size.

”The New Zealand dollar buying program commences on Feb. 15 but we will consider foreign currency buying after that,” said Craig Stobo, chairman of LGFA. “We will look to start exploring when our new CEO comes on board in January.”

Having access to international markets gives the LGFA more options to find the right price and liquidity, he said. “We will monitor opportunities and make recommendations to the board.”

LGFA was this week assigned an AA+ credit rating by Standard & Poor’s and Fitch Ratings - putting it on a par with the nation’s sovereign rating.

“The stable outlook reflects our expectation that there will be no change in the New Zealand government’s support of LGFA,” Standard & Poor’s said in a statement.

The agency’s credit rating is higher than for many of its members who have ratings in their own right. Greater Wellington Regional Council credit rating was affirmed at AA by S&P yesterday.

LGFA appointed Phil Combes as its new chief financial officer in November. He will take up the Wellington-based role early next year.

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