APPENDIX 1 New Zealand local government debt report _2013 Q2_

Transcription

1 APPENDIX 1 New Zealand local government debt report _2013 Q2_ Page 311 of 374

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3 pwc.co.nz Local government debt report Quarterly report on the local government debt market: Q August 2013 Page 313 of 374

4 Table of contents Background 1 Methodology for secondary market credit margin analysis 2 Market commentary 3 Primary debt issuance margins (LGFA sourced and direct) 4 LGFA credit margin since inception 5 LGFA credit margin versus rated local government 6 Issuance amounts 10 Wholesale versus retail 13 Arranging bank/broker/lgfa market share 14 Appendix 1: 2013 issuance margins by quarter 16 Appendix 2: 2012 issuance margins by quarter 17 Appendix 3: 2011 issuance 19 Appendix 4: Issuance volume since PwC Page 314 of 374 Page i

5 Background We produce this report on a quarterly basis for the benefit of our local government advisory clients, other local government borrowers and investors, our investor clients, NZ fixed interest fund managers, banks, brokers and investment advisors. The report summarises the primary-issuance credit margins (including dealer fees), issue amounts, maturity, and arranger in the wholesale / private placement and retail local government bond market by quarter and a year-to-date basis where data has been available. Co-lead deals are shared equally across arrangers for allocation. In regards to retail issues; brokerage, lead manager fees, legal and listing costs are estimated, annualised and added to the credit margin. We compile the report from information received from the arranging banks, brokers and LGFA. While all efforts are given to provide complete transparency in the market, at times some information may be incomplete due to influences outside of our control and may be subject to revision. Page 315 of 374 PwC Page 1

6 Methodology for secondary market credit margin analysis Within the report we include analysis comparing the fair value credit margins of the LGFA bonds in the secondary market (provided by NZ s trading banks) against local government and Kauri bonds of similar maturities. The exercise explores the relativity of the LGFA bonds to similarly dated bonds. If new local government bonds are issued of a comparable maturity, and traded in the secondary market, they will be added into the data series. When the LGFA issues alternative maturities we will also track them against appropriate benchmark bonds. Page 316 of 374 PwC Page 2

7 Market commentary Local government issuance in the second quarter of 2013 totalled $780 million from 31 different Councils which is the third highest quarterly issuance since we began tracking the data in The vast majority (89%) of Q2 s issuance was transacted via the LGFA. Only five transactions were non LGFA. Using the five year maturity as a reference point, credit margins ranged from swap+60 basis points for AA rated Councils to swap+90 basis points for unrated Councils. There are signs that the contraction in credit margins has reached an inflection point and margins are starting to turn higher. Wholesale swap rates have increased sharply since the April lows (5-year swap rate has increased from 3.20% to 4.40%), a result of the US Federal Reserve indicating a scaling back of the quantitative easing programme from the current US$85 billion per month of asset purchases. The Fed has pointed out that the tapering of QE is akin to taking one s foot off the accelerator and remains a long way from actually raising interest rates. However, the reaction from bond markets has been an aggressive sell-off in bonds (yields higher) and as such fixed interest investors are wary of adding to positions that are at risk of suffering significant mark-to-market losses in an increasing interest rate environment. The result has been a widening of credit margins globally to which the NZ local government market has not been immune. The increase in credit margins induced by risk aversion (Fed tapering, renewed European debt concerns) may be tempered in NZ by the lack of bond supply. Holders of bonds may be reluctant to sell positions as the scope to re-enter the market is limited. PwC Page 317 of 374 Page 3

8 Primary debt issuance margins (LGFA sourced and direct) Chart showing the primary issuance margin of local government debt (inclusive of on-lending margins from LGFA) during Q2 2013: Chart showing the primary issuance margin of local government debt (inclusive of on-lending margins from LGFA) 2013 (YTD): Page 318 of 374 PwC Page 4

9 LGFA credit margin since inception Margin over government bonds Margin over swap Page 319 of 374 PwC Page 5

10 LGFA credit margin versus rated local government LGFA April 2015 margin over government bonds LGFA April 2015 margin over swap Page 320 of 374 PwC Page 6

11 LGFA December 2017 margin over government bonds LGFA December 2017 margin over swap Page 321 of 374 PwC Page 7

12 LGFA March 2019 margin over government bonds LGFA March 2019 margin over swap Page 322 of 374 PwC Page 8

13 LGFA May 2021 margin over government bonds LGFA May 2021 margin over swap Page 323 of 374 PwC Page 9

14 Issuance amounts Chart showing the total issuance amount per designated tranche size during Q2 2013: Chart showing the amount of new local government debt issued by credit rating for calendar year 2012: Page 324 of 374 PwC Page 10

15 Chart showing the amount of new local government debt issuance by fixed and floating interest rate for 2013: Chart showing the maturity profile and issuance amount of new local government debt issued 2013: Page 325 of 374 PwC Page 11

16 Chart showing the maturity profile and issuance amount of new local government debt issued 2012: Page 326 of 374 PwC Page 12

17 Wholesale versus retail Chart showing the funding market of new local government debt issued in calendar year 2013: Chart showing the funding market of new local government debt issued in calendar year 2012: Page 327 of 374 PwC Page 13

18 Arranging bank/broker/lgfa market share Chart showing the breakdown of organising bank/broker of new local government debt issuance in calendar year 2013: Chart showing the breakdown of organising bank/broker of new local government debt issuance in calendar year 2012: Page 328 of 374 PwC Page 14

19 Chart showing the breakdown of organising bank/broker of new local government debt issues over 2011: Page 329 of 374 PwC Page 15

20 Appendix 1: 2013 issuance margins by quarter Chart showing the primary issuance margin of local government debt during Q1 2013: Page 330 of 374 PwC Page 16

21 Appendix 2: 2012 issuance margins by quarter Chart showing the primary issuance margin of local government debt during Q1 2012: Chart showing the primary issuance margin of local government debt during Q2 2012: Page 331 of 374 PwC Page 17

22 Chart showing the primary issuance margin of local government debt during Q3 2012: Chart showing the primary issuance margin of local government debt during Q4 2012: Page 332 of 374 PwC Page 18

23 Appendix 3: 2011 issuance Chart showing the primary issuance margin of local government debt during 2011: Chart showing the total issuance amount per designated tranche size during 2011 ($1,721 million): Page 333 of 374 PwC Page 19

24 Appendix 4: Issuance volume since 2005 Page 334 of 374 PwC Page 20

25 Get in touch Stuart Henderson Partner T: M: E:stuart.r.henderson@nz.pwc.com Roger Kerr Partner T: M: E: roger.j.kerr@nz.pwc.com Brett Johanson Partner T: M: E: brett.a.johanson@nz.pwc.com Chris Hedley Director T: M: E: chris.m.hedley@nz.pwc.com Jason Bligh Associate Director T: M: E: jason.p.bligh@nz.pwc.com Duncan Shaw Associate Director T: M: E: duncan.s.shaw@nz.pwc.com Tom Lawson Analyst T: E: tom.f.lawson@nz.pwc.com Alex Wondergem Analyst T: E: alex.j.wondergem@nz.pwc.com DISCLAIMER: The information contained in this correspondence is given in good faith and has been derived from sources believed to be reliable and accurate. However, neither PricewaterhouseCoopers nor any of its partners or employees gives any warranty of reliability or accuracy and shall not be liable (whether in contract, tort (including negligence), equity or any other basis) for errors or omissions herein, or any loss or damage sustained by any person relying on such information, whatever the cause of such loss or damage PricewaterhouseCoopers New Zealand. All rights reserved. PwC and PricewaterhouseCoopers refer to the New Zealand member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. Page 335 of 374 PwC Page 21

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27 File Reference: Significance of Decision: Receives Only - No Decisions Report To: Finance, Audit and Risk Committee Meeting Date: 25 September 2013 Report From: Brian Trott, General Manager Corporate Local Government Funding Agency (LGFA) Quarterly Report 2012/13 - for the quarter ended 30 June 2013 Executive Summary This report provides an overview of the LGFA operations for the quarter ended 30 June Recommendations That the Finance, Audit and Risk Committee under its delegated authority: 1 Receives the report, Local Government Funding Agency (LGFA) Quarterly Report 2012/13 - for the quarter ended 30 June Local Government Funding Agency quarterly report The quarterly LGFA operations report is provided for information. LGFA has prepared this report for the quarter ended 30 June Highlights during the quarter i. LGFA Bond issuance increased by $450 million (raising the total bonds issued to $2.475 billion) ii. LGFA Lending increased by $695 million (raising total lending to $2.481 billion) iii. An assessment of member Council s debt interest rate savings were; AA rated A rated Unrated 40 basis points 42 basis points 45 basis points iv. Bond Tenders continue to receive bids exceeding volume offered by a minimum ratio cover of 2.0 : 1. The average bid ratio is 3.8 : 1. Page 337 of 374

28 here to enter text. Local Government Funding Agency (LGFA) Quarterly Report 2012/13 - for the quarter ended 30 June 2013 v. Two further Councils joined the LGFA as Lenders and guarantors and One Council as a borrower only. Primary Objective The attached report also discusses the LGFA s achievement of its primary objective of optimising debt funding terms and conditions for participating Local Authorities. This was through providing; Lowest possible interest rates Longer term borrowing Certainty of access to debt markets 3 Additional LGFA articles No additional articles were provided with this quarters report. Andy Dixon Asset Accountant for General Manager Corporate 18 September 2013 Click Page 338 of 374 2

29 APPENDIX 1 LGFA Quarterly Report June 2013 Page 339 of 374

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31 Quarterly Report For period ended 30 June COMMENTARY ON OPERATIONS FOR THE QUARTER On 10 April 2013 LGFA held its eleventh bond tender. A total of $165 million was issued, bringing bond outstandings to $1.950 billion. Table 1: Results of LGFA Bond Tender Number 11 Tender Date: 10 April 2013 Settlement Date: 15 April 2013 Series Offered 6.00% 15 Apr % 15 Mar 2019 Coupon Rate: 6.00% 5.00% Amount Offered: $10million $155 million Total Bids Submitted: $50 million $734 million Total Number of Bids Submitted: 5 42 Total Successful Bids: 0 $165 million Total Number of Successful Bids: 0 26 Successful Range: n/a 3.705%-3.84% Weighted Average Successful Yield: n/a 3.79% Unsuccessful Range: 3.11%-3.20% 3.845%-3.90% Weighted Average Unsuccessful Yield: 3.16% 3.86% On 15 May 2013 LGFA held its twelfth bond tender. A total of $240 million was issued, bringing bond outstandings to $2.190 billion. Table 2: Results of LGFA Bond Tender Number 12 Tender Date: 15 May 2013 Settlement Date: 20 May 2013 Series Offered 6.00% 15 Dec % 15 Mar % 15 May 2021 Total Amount Offered ($million) Total Amount Allocated ($million) Total Number of Bids Received Total Amount of Bids Received ($million) Total Number of Successful Bids Highest Yield Accepted (%) Lowest Yield Accepted (%) Highest Yield Rejected (%) Lowest Yield Rejected (%) Weighted Average Accepted Yield (%) Weighted Average Rejected Yield (%) Amount Allotted at Highest Accepted Yield as Percentage of Amount Bid at that Yield* Page 341 of

32 Quarterly Report For period ended 30 June 2013 On 19 June 2013 LGFA held its thirteenth bond tender. A total of $285 million was issued, bringing bond outstandings to $2.475 billion. LGFA s debt program in 2013 is now expected to be around $1.5 billion (with $940 million issued in four tenders to date). Table 3: Results of LGFA Bond Tender Number 13 Tender Date: 19 June 2013 Settlement Date: 24 June 2013 Series Offered 6.00% 15 Dec % 15 May 2021 Total Amount Offered ($million) Total Amount Allocated ($million) Total Number of Bids Received 8 56 Total Amount of Bids Received ($million) Total Number of Successful Bids 3 26 Highest Yield Accepted (%) Lowest Yield Accepted (%) Highest Yield Rejected (%) Lowest Yield Rejected (%) Weighted Average Accepted Yield (%) Weighted Average Rejected Yield (%) Amount Allotted at Highest Accepted Yield as Percentage of Amount Bid at that Yield* *Individual allotments may vary due to rounding. Highlights of LGFA s thirteenth bond tender were: A bid cover ratio of 2.0 times ($577 million of bids received for $285 million of bonds offered). This result was well below the average bid cover ratio of 3.8 times achieved by LGFA to date. Interestingly enough, the introduction of our new May 2021 bond at the last two tenders has coincided with the two lowest cover ratios recorded. Because an 8 year maturity is too long for the major NZ bank balance sheets to invest in, we may have lost some cornerstone investors at recent tenders. Marketing to offshore investors will help to counteract this reduction in domestic demand. In addition, the size of the last two tenders, and market volatility created by the QE tapering debate, also contributed to below average cover ratios. Margins over NZGBs and mid-swap levels at the last three tenders were: Page 342 of 374 2

33 Quarterly Report For period ended 30 June 2013 LGFA Spreads to NZGBs/Swap (bps) Tender No June 2013 Tender No May 2013 Tender No April 2013 Bond Maturity NZGB spread Swap spread NZGB spread Swap spread NZGB spread Swap spread May Not offered Not offered Mar 2019 Not offered Not offered Dec Not offered Not offered Our May 2021 margin over NZGBs weakened by 6 bps from last tender. Given the difficult market environment (QE tapering debate and NZDMO s poor tender the following day), and the fact that some supranational borrowers (eg EIB) sold off 30 bps during the June minicrisis, this was a satisfactory result. LGFA s December 2017 margin to NZGBs widened by only 3 bps, given the much smaller volume offered. Swap spreads widened by 10 bps (May 2021s) and 6 bps (December 2017s) as NZDMO s swap spreads continue to weaken. Their 10 year swap spread peaked above 60 bps in early May 2013, but has since fallen back sharply to around 30 bps currently. 2. PERFORMANCE AGAINST OBJECTIVES AND PERFORMANCE TARGETS Primary Objective LGFA will operate with the primary objective of optimising the debt funding terms and conditions for Participating Local Authorities. Among other things this includes: Providing debt to Participating Local Authorities at the lowest possible interest rates commensurate with the relevant maturity LGFA has met its primary objective by continuing to achieve significant improvement in the pricing of our benchmark 15 December 2017 bond. The December 2017 maturity is regarded as our benchmark bond because it has a large volume outstanding, the most liquidity and longest history of issuance. During the June quarter 2013, the margin to NZGB for this maturity improved by a further 7 bps. However, a mini crisis in global bond markets, caused by speculation about the future of quantitative easing (QE) in the United States, also created significant volatility in New Zealand s debt market. In this difficult environment, NZDMO s swap spreads fell sharply to be 15 bps lower for the December 2017 maturity over the June quarter. In turn, this pushed LGFA s swap spread up by 8 bps in the past three months. In coming months there is now plenty of scope for LGFA bonds to improve their pricing performance as the market comes to terms with the future direction of US monetary policy. From the inaugural tender held on 15 February 2012 to date, there has been a substantial improvement of 56 basis points (bps) in the December 2017 s margin to swap (as outlined in the table below): Page 343 of 374 3

34 Quarterly Report For period ended 30 June 2013 Margins 15 Feb 2012 (bps) 30 June 2013 (bps) Pricing Improvement (bps) LGFA margin to NZGB NZGB margin to swap (24) (40) 16 LGFA margin to swap Some of this pricing improvement has resulted from LGFA s ongoing marketing activities, including: - Embarking on a significant European investor marketing mission to the UK, Switzerland and Germany. The Chairman and Chief Executive of LGFA met with a number of private banks and institutional investors in these countries from June Meeting with one of Asia s largest central banks in Sydney in early May 2013 (at their request) to update them on LGFA s performance in its first 18 months of operation. Making longer-term borrowings available to Participating Local Authorities We continued to offer two maturities of five years and longer to participating councils: - 15 March 2019 bond (just under six years), first issued at the fourth bond tender held on 6 June 2012; and - 15 May 2021 bond (eight years), first issued at the twelfth bond tender held on 15 May Enhancing the certainty of access to debt markets for Participating Local Authorities, subject always to operating in accordance with sound business practice Access to debt markets has been enhanced by the consistently strong cover ratios achieved at most LGFA bond tenders held to date. Our cover ratio (ie ratio of total amount bid to total amount offered) for each tender has been: LGFA Tender Volume Bid ($m) Volume Offered ($m) Cover Ratio (times) 1 1, Page 344 of

35 Quarterly Report For period ended 30 June 2013 From the table, it is important to note that: - Total bids received have amounted to $9.5 billion in the first thirteen tenders; - The average cover ratio has been 3.8 times; and - Our lowest cover ratio to date (2.0 times) occurred at the last tender in difficult market conditions (where offering a large amount of a relatively new long maturity at the height of the QE tapering debate proved to be a challenging assignment). Additional objectives LGFA has a number of additional objectives which complement the primary objective. These objectives will be measurable and achievable and the performance of the company in achieving its objectives will be reported annually. These additional objectives are to: Operate with a view to making a profit sufficient to pay a dividend in accordance with its stated Dividend Policy set out in section 6 Two key factors have contributed to LGFA performing ahead of budget during 2012/13: - Bond issuance to date ($2.475 billion) and on-lending activity ($2.481 billion) are currently running at around double the volume anticipated in the original business case for LGFA. - Overheads have been well contained. As a result, LGFA anticipates being in a position to make a larger first dividend payment than forecast in the SOI. Become the primary source of debt funding for Participating Local Authorities Councils have strongly supported LGFA. To date, 17 (out of 18) inaugural participating councils have borrowed from us. By 30 June 2013, another 21 councils had joined LGFA (12 as shareholders at the Second Opening on 30 November 2012, and 9 as borrowers in two intakes on 18 February and 5 April 2013). After the 19 June tender, 20 of these 21 new members had borrowed from LGFA. In all, 37 out of 39 participating councils had borrowed from LGFA by the end of the June quarter. Operate in a manner to ensure LGFA is successful and sustainable in the long-term The key to LGFA s long-term sustainability is to ensure that it can always fund councils at lower rates than they can fund themselves. To provide evidence of LGFA s performance against this objective, we have included two charts below (produced by PricewaterhouseCoopers). These charts compare LGFA s spread to swap against a number of other issuers for our December 2017 and March 2019 maturities. Page 345 of 374 5

36 Quarterly Report For period ended 30 June LGFA December 2017 secondary market credit margin over swaps Margin over swap (basis points) Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Margin over swap (basis points) Source: ANZ, BNZ, Westpac, LGFA. Auckland CC 6.52% Sep 2017 (AA) Dunedin CT 6.79% Nov 2016 (AA) LGFA 6.00% Dec 2017 (AA+) ChCh CH 6.87% June 2016 (AA-) ANZ 6.32% Feb 2016 (AA-) Kommunalbanken 4.25% May 2017 (AAA) Margin over swap (basis points) LGFA March 2019 secondary market credit margin over swaps Margin over swap (basis points) Source: ANZ, BNZ, Westpac, LGFA. LGFA 5.00% Mar 2019 (AA+) ANZ 6.25% Mar 2019 (AA-) Auckland Council 4.41% Dec 2018 (AA) Kommunalbanken 5.00% Mar 2019 (AAA) Rabobank 6.10% Mar 2019 (AA-) Page 346 of 374 6

37 Quarterly Report For period ended 30 June 2013 From the charts above we estimate that as at end June 2013, LGFA was saving AA rated councils approximately: - 20 bps in annual interest costs on a December 2017 maturity bps in annual interest costs on a March 2019 maturity. The basis for these estimates is set out in the table below: Margins as at 30 June 2013 December 2017 maturity (bps) March 2019 maturity (bps) AA rated councils margin to swap Less LGFA margin to swap (33) (40) LGFA Funding Advantage Less LGFA Base Margin 30 (20) 40 (20) LGFA Net Funding Advantage Add LGFA Effect * Total saving for AA rated councils * The LGFA effect represents the estimated conservative reduction in AA rated councils margin to swap as a result of LGFA operations. From May to June 2012, the margin to swap for AA rated councils fell by 10 bps, with no corresponding move in swap spreads for other borrowers. This suggests that potential access to cost effective LGFA funding has enabled these councils to reduce their borrowing margin by around 10 bps. Educate and inform all Local Authorities (both participating and non-participating) on matters within the scope of LGFA's operations During the quarter ended 30 June LGFA: - Provided an update to all participating councils on the results of the latest LGFA bond tender. This new initiative is designed to provide timely information to our borrowers to assist them in formulating their debt management strategies. - Participated in the annual Local Authority Workshop arranged by Bancorp. This event was held in Auckland in May 2013, and enabled LGFA to discuss its performance to date with a wide range of councils (both members and non-members of LGFA). - Held regular discussions with PricewaterhouseCoopers and Bancorp (as key advisers to the local government sector) on various matters of interest to their council clients. Become a leading participant in the New Zealand capital markets Our role as a leading participant in the New Zealand capital markets continues to be well recognised in major industry awards: - LGFA won Debt Issue of the Year at the INFINZ Annual Awards Dinner held in Auckland on 8 May 2013 (attended by over 770 market participants). Our inaugural $300 million bond tender held on 15 February 2012 was judged as the best debt issue of the 2012 year. Page 347 of 374 7

38 Quarterly Report For period ended 30 June We are also in the process of entering the 2013 Deloitte Fast 50 competition. This is a business benchmarking competition that recognises growth achieved by large or small, public or private companies. LGFA s rapid growth in terms of revenue, profitability and balance sheet size should enable us to perform well in this competition. Provide excellent service to Participating Local Authorities Settlement of our twelfth bond tender took place on 20 May The settlement process was completed very smoothly, even though this was the largest (in terms of participation) and most complex (with four councils borrowing from us for the first time) tender to date. The May bond tender set two new records: - Highest number of participating councils (18); and - Equal highest number of individual Term Sheets (21). Settlement of our thirteenth bond tender taook place on 24 June This tender also set a new record for the highest volume of on-lending ($286 million), which beat the previous mark of $281 million set in October Ensure excellent communication exists and be professional in its dealings with all its stakeholders During the quarter ended 30 June, LGFA: - Met with the Shareholders Council on 10 May 2013 in Wellington. The Chairman and Chief Executive of LGFA discussed a number of suggested changes to the draft SOI 2013/14 proposed by the Shareholders Council. This was a very constructive meeting that focused on ways for LGFA to continuously improve its reporting to shareholders, particularly on the more technical aspects of our business. - Met with the Chairman of the Shareholders Council on 7 June 2013 in Wellington. Key topics discussed at this meeting included proposed changes to the arrangements for filling casual vacancies on the Shareholders Council, progress on amending the draft SOI 2013/14, and the timing of important future events (LGFA s first dividend payment, the next Annual General Meeting and a proposed Shareholders Day). - Participated in a Local Government Funding Agency Roundtable held in London on 25 June The meeting was organised by ANZ and KangaNews, and enabled two established agencies (Kommuninvest from Sweden and LGFA from New Zealand) to share experiences and ideas with representatives from the UK and France (who are looking to set up similar entities). Ensure its products and services are delivered in a cost-effective manner During the quarter ended 30 June, LGFA: - Charged a base margin to councils that averaged 0.23%, well below the maximum permitted of 0.40%; and - Restricted annual operating costs to $3.0 million for 2012/13; below the SOI target of $3.2 million. Page 348 of 374 8

39 Quarterly Report For period ended 30 June 2013 Consult with Shareholders regarding the potential requirement for LGFA Borrowers to obtain comprehensive insurance cover Following settlement of the thirteenth bond tender on 19 June 2013, LGFA has now on-lent $2.481 billion to councils. To date, there has been no requirement for borrowers to obtain or retain comprehensive insurance cover. - LGFA s current credit assessment approach is to consider insurance cover along with various business interruption risks (including risks to physical assets) as part of an overall credit risk assessment of individual councils. In this regard, LGFA is aware that self-insurance arrangements eg. via the accumulation of financial assets, may be as effective as external insurance cover. - If this becomes an issue, LGFA will undertake future consultation with shareholders on the appropriate level of insurance cover for borrowers. Review the appropriateness of LGFA s broker business model The success of the broker business model is evident from three key factors: - Overall profitability (ie the retained earnings position) has significantly exceeded budget in the first 18 months of operations; - Profitability has been achieved without the need for LGFA to take on significant interest rate risk eg. Value-at-Risk¹ is currently running at only 30% of policy limits; and - Significant improvement in the pricing of LGFA bonds has generated corresponding savings for AA rated council borrowers of around 30 bps in annual interest costs on a March 2019 maturity. Maintain LGFA s credit rating equal to the New Zealand Government sovereign rating where both entities are rated by the same Rating Agency - On 30 November 2012, Fitch affirmed LGFA s local currency credit rating at AA+ and foreign currency credit rating at AA. The outlook on both ratings is stable. - On 20 December 2012, Standard & Poor s affirmed LGFA s local currency credit rating at AA+ and foreign currency credit rating at AA. The outlook on both ratings is stable. - LGFA s credit ratings from both Fitch and Standard & Poor s are the same as the New Zealand sovereign ratings. Achieve the Financial Forecasts set out in section 4 LGFA s actual financial results (for key items set out in Section 4 of the SOI), for the 2012/13 financial year are compared with forecast in the table below. ¹ Value-at-Risk (VaR) is a statistical market risk management tool which seeks to determine the largest dollar loss likely to be suffered by LGFA over a 1 day period with a 95% confidence level. Page 349 of 374 9

40 Quarterly Report For period ended 30 June 2013 $m 2012/13 Actual $m 2012/13 SOI Forecast Total Net Income Overheads (3.00) (2.7) Net Profit Borrower Notes Interest (0.86) (0.5) Surplus* *before dividend payment Achieve the Dividend Policy set out in section 6 Refer to our earlier comments on this issue. Performance Targets Six performance targets are specified for LGFA in the SOI. Progress against each of these targets is discussed below, including an explanation of any material variances. Performance Measure Target Result Outcome (Target met?) 1 Average cost of funds relative to NZGS <0.50% 0.84% x 2 Average margin above LGFA s cost of funds <0.40% 0.23% 3 Annualised operating overheads <$3.2 million $3.0 million 4 Lending to participating councils >$900 million $2,481 million 5 Number of council shareholders Number of eligible borrowers 40 39* x * Although only 39 councils had joined LGFA as at 30 June 2013, 42 councils had been approved as borrowers by this date. (i) Average cost of funds There are two key reasons for LGFA s relative cost of funds averaging 34 bps over the target level of 50bps: We introduced a new May 2021 bond at our 15 May 2013 tender. Longer dated bonds price at a relatively higher margin above NZGS than shorter dated bonds, as the following table clearly shows. LGFA MARGINS TO NZGS As at 30 June 2013 Maturity Margin (bps) Apr Dec Mar May Page 350 of

41 Quarterly Report For period ended 30 June 2013 A mini crisis in global bond markets during June 2013 (created by comments from US monetary authorities on their potential exit path from quantitative easing) adversely affected LGFA s margins at the 19 June 2013 bond tender. For these reasons, LGFA s weighted average margin to NZGS actually increased from 76 bps in the March quarter to 84 bps in the June quarter. It is interesting to note (from the table above) that our current weighted average spread to NZGS for all four LGFA maturities (applying a 25% weighting to each bond) is just 69 bps. (ii) Number of eligible borrowers Three councils joined LGFA on 5 April These councils are: Ashburton District Council Grey District Council Nelson City Council To date, Grey District Council is the only one to join LGFA as a borrower only. We expect Tararua District Council to join LGFA as a borrower only prior to our next bond tender to be held on 31 July Wairoa and Hurunui District Councils have also been approved as borrowers by the LGFA Board, but have yet to complete the necessary legal documentation to become members of LGFA. When this is completed, there will be a total of 42 eligible borrowers signed up with LGFA. 3. DETAILS OF EVENTS OF REVIEW There have been no events of review in respect of any Participating Local Authority. Page 351 of

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