The New Zealand local authority sector has no doubt benefited from the successful launch of a municipal bond agency. As chief executive of the New Zealand Local Government Funding Agency (LGFA), I believe an inspection of our structure, practice and background can aid the UK Municipal Bond Agency as it opens for business.
Established in December 2011, the LGFA commenced issuance of bonds in February 2012. Since then, we have lent approximately NZ$5.8bn (£2.8bn) to the sector and our asset base is forecast to grow to NZ$10bn (£4.8bn) by 2020. Aside from the New Zealand Government, the LGFA is the largest issuer of NZ$ denominated securities and has the most NZ$ bonds outstanding of any issuer in New Zealand. Membership to the LGFA is not compulsory and its members are not obliged to borrow; still the agency has earned a 71% market share of total council borrowing over the past year.
Prior to our launch, councils borrowed for terms of between three and five years. However, New Zealand council assets – such as roads, transport and water - have a very long life, and this has also allowed us to reduce the refinancing risk for councils, and lend on terms ranging from three months to twelve years.
Traditionally, New Zealand councils were funded by issuing bonds to banks and institutional investors. Whilst Australasian banks have AA- credit ratings, New Zealand councils are grouped in the A+ to AA rating range. The LGFA has an AA+ rating meaning we can issue bonds at tighter credit margins than any other borrower in New Zealand, apart from the government. Consequently, local authorities have reduced their borrowing costs and their reliance on the banking sector.
As a result, New Zealand councils have become a single borrowing entity, representing the entire sector through increased advocacy with central government, media, credit rating agencies and investors, which has furthered the sector’s credibility. Councils can negotiate group deals with credit rating agencies for ratings, meaning local authorities have become attractive to new kinds of investors, in particular, to offshore investors and bank’s asset liability managers.
The LGFA can provide the NZ$ local government sector with funding at any time and at the cheapest cost. Consequent savings have varied over the last four years – between 0.10% and 0.25% savings per annum on direct LGFA lending of NZ$6bn (£2.9bn) and indirectly on the NZ$14bn (£6.7bn) of total sector debt. Given that the LGFA has thus far been operating in a reasonably benign credit environment, it would be fair to assume that these savings will continue, if not increase, over the entire credit cycle.
Such savings have certainly had a positive social impact, which the UK MBA will hope to replicate. Interest is one of the single largest expenditure items and any savings allow politicians to either reduce property taxes, provide additional services to the community or repay debt faster.
However, it is vital that the UK MBA achieve scale and the support of sector. The more the agency has, the more successful it will be, as evidenced by the two attempts in the 1990s to establish a similar vehicle in New Zealand, which failed due to limited support from the sector. By treating every council fairly and equally, except for differentiated pricing, the support of the councils can be earned and deserved. Additionally, it will be important for the UK MBA to garner the support of larger councils, which must display market leadership in order to achieve scale.
The UK MBA must remember to take a long-term view. The outcomes of a municipal bond agency must be assessed over a full credit and interest rate cycle, and the benefits may take time to manifest. Nonetheless, based on our experience establishing the LGFA, a UK municipal bond agency can only be beneficial for local authorities, and their residents.
• Mark Butcher will be speaking at the Future capital financing for councils and combined authorities conference being held by the Local Government Association and UK Municipal Bonds Agency in London tomorrow.
