Auckland Council raising $200m in bond offer at higher rate than last issue

The council wants to raise up to $100 million.

Auckland Council will raise up to $200 million through a 10-year retail bond issue, at a higher indicative margin than its last offer in March.

Last month, the council deferred a planned offer, citing market volatility which followed the UK's referendum vote to exit the European Union.

The council wants to raise up to $100 million, with the right to accept up to $100 million in oversubscriptions, and said the bonds would mature in July 2026 and will be offered at an indicative margin of 0.9 percent per annum over the comparable benchmark. The 10-year swap rate, a benchmark for corporate borrowing, was recently at 2.45 percent, indicating Auckland Council will pay 3.35 percent.

The council's last retail bond issue, four months ago, raised $250 million selling four-year bonds at an annual interest rate of 3.04 percent, a record low for the local authority in New Zealand's biggest city. The council set the coupon at 60 basis points over the comparable swap rate, then at 2.43 percent.

"All issuers in the marketplace have been required to pay a higher margin when they've been accessing the financial markets, and we've seen that most predominately in the financial sector - banks have had to pay higher spreads," Fergus McDonald, head of bonds and currency at Nikko Asset Management, said. "It's been a function of global trends, banks especially in the Eurozone and with large exposures into Europe have been deemed to be a little more risky, banks in general have to pay higher credit margins. That's flowed on to all issuers, because investment markets in many cases are about comparisons between alternate uses of your funds - if one large sector get pushed up that tends to push up all issuers, and Auckland has not been immune from that."

The offer is reserved for clients of the joint lead managers - ANZ Bank New Zealand, Bank of New Zealand and Westpac Banking Corp - along with institutional investors and other approved participants. The actual margin and interest rate of the bonds will be announced following a bookbuild after the offer closes tomorrow.

Record low borrowing costs have lured companies back to the debt market to raise funds, with Genesis Energy, Meridian Energy, Spark New Zealand, Auckland International Airport and Fonterra Cooperative Group all selling new bonds this year. The council said it expects the bonds to be quoted on the NZX debt market and expects they will have a long-term credit rating of AA from Standard & Poor's and Aa2 from Moody's.