LGFA bonds lure foreign investors seeking liquid, highly-rated alternative to NZ government debt

LGFA's Mark Butcher said there was a growing recognition of the similarity of central government bonds and his agency's debt.

The Local Government Funding Agency, which sells bonds on behalf of 30 local authorities in New Zealand, says foreign investors are increasing their holdings of the debt as a relatively liquid, highly rated alternative to sovereign bonds.

The LGFA has a domestic currency credit rating of AA+ with Standard & Poor's, the same rating as the New Zealand government. It was established in February 2012 and has a target to reduce local authority borrowing costs by at least 30 basis points. It is now the second-cheapest borrower after the government. Bonds on issue have risen to $5.8 billion and are projected to rise to $8 billion by 2018.

LGFA chief executive Mark Butcher told a media briefing in Wellington there was a growing recognition of the similarity of central government bonds and his agency's debt, which were increasingly being seen as an alternative.

"We're seeing on a quarterly basis somewhere between $600 and $700 million of our bonds trading - we're the second most liquid investment in the New Zealand debt market after the government," Butcher said. "It's long-term (offshore) investors who've been holding New Zealand investments for a number of decades who would normally hold it in government bonds, and they hold close to 70 percent of government bonds. We're seeing them switch out of government bonds and taking some LGFA bonds as investments in their portfolios."

The borrower now has up to $1.8 billion of rolling 12 month issuance on behalf of the sector, and on a quarterly basis is issuing between $300 million and $550 million of debt. Increased liquidity has encouraged overseas investors to increase their holdings of LGFA bonds to 28 percent of those on issue from 18 percent a year ago, Butcher said. They've doubled their holdings to about $1.4 million from $700 million a year earlier, based on the increased liquidity of the bonds on issue.

"What Standard and Poor's like is we are now the dominant lender to the local government sector, over 40 percent of the debt in the sector is now lent by LGFA, and that's growing by about 10 percent every year," he said. "We've now become the sole lender to the sector effectively."

The international investors are largely Japanese and European institutions, Butcher said. The LGFA went through the US last year and picked up a number of real money accounts and pension funds out of the US.

Butcher said the borrower also saw retail investors and Kiwisaver as a growth market.

More councils are getting credit ratings, and the LGFA encourages those with more than $50 million in debt to do so, Butcher said. A credit rating earns councils a discount to their borrowing costs from the LGFA, depending on how they're rated. Across New Zealand's 78 councils 22 have a credit rating, 20 of which are LGFA members.

Of the money LGFA lends, 48.8 percent, or $2.6 billion, goes to AA rated councils, 10.7 percent, or $563 million, to AA- councils and 27.8 percent, or $1.5 billion, to A+ rated councils.

Councils have shifted to 30-year infrastructure strategies, which was required under amendments to the Local Government Act, to better understand how infrastructure will be renewed and get a clear outlook on funding for the renewal. The country's councils have $120 billion in assets, some of which are coming to the end of their lifetime and due for either renewal or replacement.


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