'Bond bank' could save 100bps, undercut banks

Wednesday 8th July 2009

A study into the potential to create a ‘bond bank’ that raises debt on behalf of local authorities has the potential to shave 10 basis points off council borrowing costs, said Lawrence Yule, president of Local Government New Zealand.

The government expects to get the results of the study in about a month and Yule says a new funding authority would have broad support from councils. Local authorities will spend an estimated $30 billion on roading and other infrastructure projects over the next decade.

“The lower the transaction costs the biggest the uptake will be,” he said.

Local authorities currently have about $4.5 billion of debt outstanding, of which $3 billion is in the capital markets, according to Asia-Pacific Risk Management, which is advising on the study along with Cameron Partners. Debt is forecast to rise to $10 billion within five years.

Local bodies with the power to raise rates can be viewed as second only to central government in the ability to ensure repayment of debt. But Yule said that’s not currently reflected in the margins charged by traditional lending sources such as banks.

Debt market activity has tended to be fragmented, with little “bulking up” of issues to get uptake from large investors, Yule said. On top of that, small debt sales still incur costs such as printing a prospectus.

A bond bank “will add a whole level of efficiencies to the market,” he said.

A fragmented market also means councils end up paying a premium for smaller issues of debt, to compensate investors for a lack of liquidity. That’s an issue that has been exacerbated during the global credit squeeze.

Only a handful of the biggest city councils having credit ratings, including New Plymouth on AAA and Christchurch on AA+. The new Auckland super-city will also have a credit rating to raise funds in its own right.

“Councils face a big spike in costs over the next decade to provide adequate sewerage, water and roads,” Finance Minister Bill English said. “We are sympathetic to any arrangement that can lower the cost of local authority borrowing.”

The proposal for a bond bank that could reduce local authority borrowing costs was one of the proposals tom come out of Prime Minister John Key’s Jobs Summit and was also a recommendation of the Financial Markets Development Task Force.

Businesswire.co.nz

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