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Christchurch can squeeze capital from investment arm without selling shares, Dalziel says

Friday 23rd September 2016

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Christchurch City Council could squeeze capital out of its investment company without having to sell shares but asset sales will still be contemplated, says Mayor Lianne Dalziel.

The mayor was explaining comments she made this week during a mayoral candidate debate ahead of local body elections that the city could extract cash from its portfolio of investments without selling shares and that "not a single share from any of these companies needs to be sold to balance the books".

Her main opponent, John Minto, is campaigning on a ticket of not selling assets, a position that has gained traction in a city needing to fund its share of rebuilding after the 2010-2011 earthquakes while owning an investment company that has paid average annual dividends of $47 million, or a total of $474 million in the past decade, and is projected to return about $1 billion more by 2025 in dividends and through other capital levers that are still to be determined.

"We're not in a state of distress, we're not in a fire sale," Dalziel told BusinessDesk. "I have never committed myself to pledge I will never sell assets but there are other ways to leverage the balance sheet to pull out some cash."

The council adopted a 2015-25 long-term plan in June last year but the document was tagged by Audit New Zealand because of a high level of uncertainty over the value of assets, repair works and the outcome of its insurance claims.

Since then the plan has been amended, cutting $131 million from its capital spending, dropping aspirational projects and smoothing the programme, while its "capital release" target for Christchurch City Holdings (CCHL) has been cut to $600 million from $750 million. The settlement of its insurance claim and under-delivery of projects meant its opening debt was $201 million less than planned, easing its short-term borrowing requirements and allowing the city to dial back increases in rates planned for the next three years. The amended long-term plan passed its audit without being tagged. 

The Local Government Funding Authority caps allowable debt at 250 percent of the council's net revenue, and the amended plan projects the ratio to top out at 180 percent in 2021. The council's net interest to rates income ratio is projected to hold at around 15 percent through until 2025, below the LGFA's 30 percent limit.

The long-term plan classifies CCHL's biggest businesses - Lyttelton Port Co, 89 percent-owned utility Orion New Zealand and 75 percent-owned Christchurch International Airport - as strategic assets with a combined value of $1.8 billion that can't be sold without public consultation.

The remaining four that could be sold, Enable Services, City Care, Red Bus and EcoCentral, have a combined value of $252 million, although the council abandoned a sale of City Care, its maintenance and construction company valued at $113 million, last month after failing to elicit an attractive offer.

Dalziel said other ways of extracting cash from CCHL include using other types of instruments such as debt. The investment company had total borrowings of about $853 million at June 30 last year, up from $729 million in 2014. Total assets stood at $3.3 billion, having about doubled in the past 10 years.

Last December, Standard & Poor's revised the outlook on the A+/A-1 credit ratings on the council and CCHL to 'stable' from 'negative'. The improvement came from S&P's assessment that the council's downside risks "are abating" and that the city was "addressing potential funding shortfalls" with "a realistic financial strategy that includes rate increases, asset sales and a revised capital programme." 

The local economy has been growing at a faster pace than New Zealand as a whole and Statistics NZ figures today showed retail and hospitality sales were $1.9 billion in the second quarter, up 4.8 percent from the same period last year. The trend for combined retail and hospitality sales in Christchurch is up 34 percent in the past six years, outpacing a 28 percent national gain.

“This is great news for Christchurch’s economy, recovery and residents,” said Gerry Brownlee, the minister supporting Greater Christchurch Regeneration. "Given the scale of the recovery and the widespread destruction the earthquakes caused, I am heartened by these latest figures".

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