DOMESTIC INVESTOR UPDATE September 2017

Transcription

1 DOMESTIC INVESTOR UPDATE September 2017

2 IMPORTANT NOTICE This presentation has been prepared by New Zealand Local Government Funding Agency Limited ( LGFA ) for general information purposes only. By listening to the presentation, or reading the presentation materials, you acknowledge and agree to the contents of this disclaimer. To the maximum extent permitted by law, neither LGFA nor any of its affiliates, directors, officers, partners, employees or agents make any representation, recommendation or warranty, express or implied as to the accuracy, completeness or currency of any of the information in this presentation and accept no responsibility or liability therefore. Data are indicative and approximate only, and all information is subject to change. Some information may be taken from publicly available sources and has not been verified by LGFA. This presentation is intended as a snapshot view of LGFA only, and LGFA has no obligation, and does not undertake or accept any responsibility or obligation, to update, expand or correct anything in this presentation or inform you of any matter arising or coming to its notice, after the date of this presentation, which may affect any matter referred to in this presentation. This presentation contains forward-looking statements including information regarding LGFA s future bond issuances and forecast financial performance based on current information, estimates and forecasts. Those statements are subject to risks, uncertainties, and assumptions which are hard to predict or anticipate, and therefore actual outcomes and performance may differ materially from the statements. Any opinions expressed in this presentation reflect the judgement of LGFA as the date hereof, and do not bind LGFA. This presentation is not a product disclosure statement, limited disclosure document or other offer document under New Zealand law or any other law. This presentation is not, and does not constitute financial advice. All reasonable care has been taken in relation to the preparation and collation of this presentation. Except for statutory liability which may not be excluded, no person, including LGFA or any person mentioned in this presentation accepts responsibility for any loss or damage howsoever occurring resulting from the use or reliance on this presentation by any person. Past performance is not indicative of future performance and no guarantee or future rights are implied or given. Nothing in this presentation is an offer to sell, or solicitation of an offer to purchase, any securities. This presentation must not be relied upon by any person for making any investment decision and will not form part of any investment contract. The information provided in this presentation is not financial or investment advice and does not take into account the investment objectives, financial situation or particular needs (including financial and taxation issues) of any particular investor. Any person considering in investing in LGFA securities must refer to any relevant offer documents and disclosures provided expressly in connection with those securities and should take their own independent financial and legal advice on their proposed investment. LGFA securities have not been and will not be registered under the United States Securities Act of 1933 (U.S Securities Act) or the securities laws of any state or other jurisdiction of the United States. LGFA securities may not be offered or sold, directly or indirectly, in the United States or to, or for the account or benefit of, any person in the United States except in transactions exempt from, or not subject to, the registration requirements of the U.S. Securities Act and any other applicable U.S. state securities laws. This presentation is proprietary to LGFA and may not be copied, distributed, disclosed or used without LGFA's express written consent. NZX Limited accepts no responsibility for any statement in this investor presentation. NZX Limited is a licensed market operator and the NZX Debt Market is a licensed market under the Financial Markets Conduct Act

3 DEVELOPMENTS : SEPTEMBER 2016 TO SEPTEMBER 2017 Bond lending facility established October 2016 Fitch reaffirm LGFA ratings at AA+ November 2016 Private placements of LGFA Bills available January 2017 April 2033 bond issued April 2017 NZ$8.0 billion of loans outstanding to fifty-two councils as at 31 August 2017 S&P reaffirm LGFA credit rating at AA+ September 2017 Loan book quality improved no rating downgrades + five councils received rating or outlook upgrade Council participation three new councils join taking total participation to fifty-three councils Non-Guarantors Central Hawke s Bay District Council, Northland Regional Council Guarantors Waitomo District Council Horizons Regional Council moved from non-guarantor to guarantor Bespoke lending increasingly popular 49% of long term lending in financial year Support from councils boosts LGFA market share to 83% and 91% (excluding Auckland Council) for year to June 2017 December 2017 refinancing of loans by councils largely completed Considering establishing an Australian Notes Programme 3

4 LGFA SPREADS TO NZGB AND SWAP (bps) Secondary market levels as at end of each month (except September 2017 as at 21 September) Average of all LGFA Bonds outstanding Source: LGFA 4

5 RELATIONSHIP LGFA SPREADS TO SWAP vs. SWAP SPREADS (bps) Secondary market levels as at end of each month (except September 2017 as at 21 September) Average of all LGFA Bonds outstanding Source: LGFA 5

6 LGFA SPREADS TO NZGB (bps) Secondary market levels as at end of each month (except September 2017 as at 21 September) Source: LGFA 6

7 LGFA SPREADS TO SWAP (bps) Secondary market levels as at end of each month (except September 2017 as at 21 September) Source: LGFA 7

8 LGFA BOND ISSUANCE LGFA Bonds Issued by Financial Year (NZ$ millions) Maturity (5 months) year to date 15-Apr Dec Mar Apr May Apr Apr Apr Apr $447m avg. $353m avg. Total Volume (NZ$ million) $258m avg. $333m avg. Average Bond Tender Size (NZ$ million) Average Issuance Term (years) 5.34 years 6.57 years 7.04 years 7.92 years 8.10 years 8.28 years 6.59 years Note: year to date as at 31 August 2017 Source: LGFA 8

9 NZD ISSUES BY TRANCHE SIZE Issuer Maturity Amount Outstanding (NZ$) World Bank (IBRD) 22/01/2021 $2,025,000,000 LGFA 15/04/2023 $1,439,000,000 LGFA 15/05/2021 $1,430,000,000 IBRD 10/02/2020 $1,400,000,000 IBRD 26/02/2019 $1,350,000,000 LGFA 15/03/2019 $1,250,000,000 International Finance Corp (IFC) 20/05/2020 $1,125,000,000 KFW Bankengruppe 29/05/2020 $1,100,000,000 IBRD 6/10/2021 $1,050,000,000 LGFA 15/04/2027 $1,046,000,000 LGFA 15/12/2017 $1,015,000,000 Rentenbank 23/04/2024 $1,000,000,000 Asian Development Bank 6/03/2019 $950,000,000 LGFA 15/04/2020 $885,000,000 IFC 26/02/2018 $875,000,000 Queensland Treasury Corporation 18/09/2017 $875,000,000 IBRD 20/02/2018 $850,000,000 Nordic Investment Bank (NIB) 30/01/2018 $850,000,000 NIB 22/01/2019 $800,000,000 Rentenbank 12/03/2019 $800,000,000 LGFA 15/04/2025 $750,000,000 Asian Development Bank 30/05/2024 $700,000,000 Inter-American Development Bank 15/12/2017 $660,000,000 NIB 19/03/2020 $650,000,000 Rentenbank 30/01/2020 $600,000,000 Export Development Canada 20/02/2018 $600,000,000 IBRD 25/01/2022 $550,000,000 Kommunalbanken (KBN) 28/03/2019 $550,000,000 KBN 11/12/2017 $500,000,000 $27,675,000,000 Note: Outstandings as at 31 August 2017 Excludes New Zealand Government Bonds Include issuers rated AA or better Issue size above NZ$500 million only LGFA 28% of this group with seven maturities IBRD 26% of this group with six maturities Source: Bloomberg and LGFA 9

10 PRIMARY AND SECONDARY MARKET ACTIVITY Note: Buy side only, does not capture intra day activity or tender activity. Activity in Dec 17 LGFA Bonds excluded from June 2017 turnover data onwards. September 2017 month and quarter is up to and including 22 September 2017 Source: LGFA 10

11 LGFA INVESTORS Source: Merlin Consulting, LGFA 11

12 LGFA INVESTOR HOLDINGS OVER TIME Source: LGFA 12

13 OFFSHORE INVESTOR MONTHLY CHANGES Source: LGFA 13

14 LGFA BILL ISSUANCE Commenced Issuance in October 2015 Monthly tenders via YieldBroker NZ$25 million 3 month Bills NZ$25 million 6 month Bills NZ$125 million of reverse enquiry private placements into bespoke maturities NZ$350 million outstanding across 1 month to 9 month maturities as at 28 August 2017 Issuance yields of current LGFA Bills outstanding 1.96% to 2.30% Rated A-1+ by S&P LGFA Bills constitute unsecured debt obligations of LGFA Any proceeds from LGFA Bill issuance and not onlent to councils invested as per Treasury Policy in Liquid Asset Portfolio Source: LGFA 14

15 DECEMBER 2017 LGFA BOND MATURITY UPDATE December 2017 Council Loans NZ$992 million originally lent to thirty-five councils NZ$584 million refinanced as at 31 August 2017 (59%) NZ$245 million assumed will not be refinanced (25%) NZ$163 million to be refinanced by approx. fifteen councils (16%) December 2017 LGFA Bond holders as at 31 August 2017 NZ$1,015 million bonds outstanding in 140 holdings (including custodians) NZ$289 million held by domestic banks (28%) NZ$294 million held by offshore investors (30%) NZ$384 million held by domestic institutions (37%) NZ$48 million held by domestic retail investors (5%) Council Original Borrowing in this maturity (NZ$ million) 1 Auckland Council $325 2 Christchurch City Council $143 3 Hamilton City Council $65 4 Tauranga City Council $60 5 Kapiti District Council $60 6 Greater Wellington Regional Council $50 7 Taupo District Council $25 8 Wellington City Council $25 9 Waikato District Council $20 10 Selwyn District Council $20 11 Whangarei District Council $20 12 Western Bay of Plenty District Council $20 13 New Plymouth District Council $16 14 Tasman District Council $16 15 South Taranaki District Council $15 16 Thames-Coromandel District Council $12 17 Palmerston North City Council $12 18 Rotorua District Council $10 19 Masterton District Council $10 20 Queenstown Lakes District Council $10 21 Whakatane District Council $8 22 Waipa District Council $7 23 Manawatu District Council $5 24 Whanganui District Council $5 25 Timaru District Council $5 26 Matamata-Piako District Council $5 27 Upper Hutt City Council $4 28 Kaipara District Council $3 29 Otorohanga District Council $3 30 Hauraki District Council $3 31 Gisborne District Council $2 32 Horowhenua District Council $2 33 Opotiki District Council $2 34 Tararua District Council $2 35 Hurunui District Council $2 $992 Source: LGFA 15

16 BESPOKE LENDING TO COUNCILS Introduced March trades transacted by 31 August 2017 with 41 councils NZ$1.411 billion of transactions completed Approx. 32% of lending since March 2015 and 49% of lending in June year Limit of 30% of balance sheet for bespoke lending VaR and PDH limits cover interest rate risk Assists with managing liquidity By Amount (NZ$ millions) LGFA Maturity Bespoke Maturity Total LGFA Tender n/a $1,118.9 $ Non LGFA tender $104.0 $188.3 $292.3 Total $104.0 $1,307.2 $1,411.2 As at 31 August 2017 By # Trades LGFA Maturity Bespoke Maturity Total LGFA Tender n/a Non LGFA tender Total As at 31 August 2017 Source: LGFA 16

17 MISMATCHES FROM BESPOKE LENDING Source: LGFA 17

18 MINIMAL MISMATCH BETWEEN LGFA BONDS AND LOANS Source: LGFA 18

19 RISK MANAGEMENT Source: LGFA 19

20 FINANCIALS Net Operating Profit Net Interest Income Total Expenses Bond Issuance NZ$11.05 million compared to budget NZ$10 million and up 15.7% yoy. NZ$17.51 million compared to budget NZ$16.58 million and up 12.8% yoy. NZ$6.47 million compared to budget NZ$6.58 million and up 8.1% yoy. NZ$1.285 billion compared to budget NZ$1.2 billion. Net Operating Profit favourable to Statement of Intent ( ) Loan book higher than forecast (councils have borrowed early to refinance their December 2017 loans and placed proceeds on term deposit) Higher than forecast loan book resulted in net interest income being NZ$0.93 million higher than budgeted Expenses have been managed under budget for the year All expense items generally in line with budget Introduction of the LGFA bond lending facility (and related issuance of NZ$350 million treasury stock) did add some costs but helped improve secondary market liquidity of LGFA bonds Budget figures taken from Statement of Intent ( ) Annual report ( ) available at Source: LGFA Annual Report 20

21 LGFA PARTICPATION AND MARKET SHARE As at 30 June 2017 Source: PwC and LGFA 21

22 LGFA COUNCIL BORROWINGS (NZ$) Source: LGFA 22

23 LENDING TO PARTICIPATING COUNCILS BY EXTERNAL CREDIT RATING External Credit Rating (S&P, Fitch) Lending (NZ$ million) Lending (%) Number of Councils AA $3, % 12 AA- $ % 7 A+ $2, % 4 Unrated $ % 29 Total $8, % 52 As at 31 August 2017 Note: One participating council has yet to borrow from LGFA Includes long and short term lending Source: LGFA 23

24 S&P RATING CHANGES OVER THE PAST FOUR YEARS Council Action Date Western Bay of Plenty District Council Outlook Revised from Stable to Positive Oct 14, 2013 Nelson City Council Outlook Revised from Stable to Positive Dec 13, 2013 Taupo District Council Outlook Revised from Stable to Positive May 30, 2014 Western Bay of Plenty District Council Upgraded from A+ to AA- Oct 14, 2014 Whangarei District Council Outlook Revised from Stable to Positive May 19, 2015 Taupo District Council Upgraded from AA- to AA May 25, 2015 South Taranaki District Council Outlook Revised from Stable to Positive May 29, 2015 Christchurch City Council Outlook Revised from Negative to Stable Dec 7, 2015 Nelson City Council Upgraded from AA- to AA Nov 23, 2015 Whangarei District Council Upgraded from AA- to AA May 19, 2016 Western Bay of Plenty District Council Outlook Revised from Stable to Positive Sep 26, 2016 Tasman District Council Outlook Revised from Stable to Positive Oct 27, 2016 Invercargill Council (non LGFA member) Outlook Revised from Stable to Negative Dec 02, 2016 South Taranaki District Council Upgraded from A+ to AA- May 19, 2017 Whanganui District Council Outlook revised from Stable to Positive June Western Bay of Plenty District Council Upgraded from AA- to AA Sep 22, 2017 As at 22 September 2017 Source: S&P, Moodys, Fitch 24

25 LGFA INTERNAL CREDIT RATINGS (as at 30 June 2016) LGFA undertakes own internal credit assessment and rating process for all council borrowers using most recent annual reports (June 2016) Primary Criteria Debt levels relative to population affordability Debt levels relative to asset base Ability to repay debt Ability to service debt interest cover Population trend LGFA Internal Ratings LGFA participating councils by internal rating category AA AA AA Secondary Criteria 30 Year Infrastructure Strategy Quality of Assets Capital Expenditure Plan Risk Management Insurance Governance Financial flexibility Cashflow Budget performance (balanced budget) Affordability of rates / Deprivation Index Natural hazards Group activities (CCO s) A A A Source: LGFA 25

26 LGFA FINANCIAL COVENANTS PARTCIPATING COUNCILS OUTCOMES FOR JUNE 2016 YEAR LGFA Financial Covenants participating councils as at 30 June 2016 with an external credit rating (22) Foundation Policy Covenant Range of councils compliance Net Debt / Total Revenue <250% Net Interest / Total Revenue <20% Net Interest / Rates <30% % to 214.4% 0.6% to 11.9% 1.2% to 15.5% LGFA Financial Covenants participating councils as at 30 June 2016 without an external credit rating (28) Lending Policy Covenant Range of councils compliance Net Debt / Total Revenue <175% Net Interest / Total Revenue <20% Net Interest / Rates <25% % to 111.0% -10.8% to 7.0% -28.6% to 11.8% Note some negative outcomes due to some councils having negative Net Debt i.e. financial assets and investments > borrowings LGFA councils operating within financial covenants Ranges highlight the differences between councils Sufficient financial headroom for most councils Improvement from 2015 for most councils Revenue increased Interest rates lower Capex and debt restrained Source: LGFA using data from individual council annual reports Note there were 50 participating councils as at 30 June

27 PERFORMANCE UNDER LGFA COVENANTS LGFA Participating Councils with an external credit rating (22 at June 2016, 20 in 2015 and 17 in both 2014 and 2013) Financial Covenant June 2016 June 2015 June 2014 June 2013 Net Debt to Revenue <250% Net Interest to Revenue <20% Net Interest to Rates <30% 87.9% 96.4% 104.7% 111.8% 6.1% 6.8% 6.6% 7.3% 9.1% 10.0% 9.6% 11.1% LGFA Participating Unrated Councils (28 as at June 2016, 25 in 2015, 26 in 2014 and 21 in 2013) Financial Covenant June 2016 June 2015 June 2014 June 2013 Net Debt to Revenue <175% Net Interest to Revenue <20% Net Interest to Rates <25% 32.4% 38.2% 42.6% 52.5% 2.2% 2.4% 2.9% 3.2% 2.9% 3.1% 4.0% 4.1% Source: LGFA using data from individual council annual reports 27

28 HOUSING INFRASTRUCTURE FUND (HIF) NZ$1 billion from Government available to assist high growth councils to advance infrastructure projects important to increase housing supply The HIF will be funded through two mechanisms: Funding for water infrastructure projects will be in the form of interest free subordinated debt from the Government for a period of up to ten years Funding for transport infrastructure will be through front loading of councils Funding Assistance Rate subsidy via the National Land Transport Fund There were seventeen indicative applications amounting to NZ$1.79 billion from seven out of the ten eligible councils NZ$889 million of funding awarded to five councils in July 2017 The final applications are non-binding on councils. Any successful bids are likely to form part of council s long term plan process Detailed business cases being currently worked on June to Dec 2017 LGFA will closely monitor draft long term plans, alternative funding structures and available headroom under the financial covenants (ability to cope with shocks) HIF Allocation Auckland NZ$300 million Waikato District NZ$37 million Hamilton City NZ$272 million Tauranga City NZ$230 million Queenstown Lakes District NZ$50 million Contingency allowance NZ$111 million Source: LGFA, Ministry of Business, Innovation and Employment 28

29 CROWN INFRASTRUCTURE PARTNERS Formerly Crown Fibre Holdings Set up to manage the building of the ultra-fast broadband network The Government will co-invest NZ$600 million alongside councils and private investors Will set up companies (SPVs) to build and own new infrastructure for housing developments Long term revenue streams will come from a combination of targeted rates and volumetric charging for the use of the infrastructure assets by new residents Councils will have the option of buying back the infrastructure at some future point Two early projects have been identified Wainui (north of Auckland) 5,500 additional homes Pukekohe, Paerata and Drury (south of Auckland) 17,800 additional homes Not just a tool for Auckland intended to be used in other fast growing areas across New Zealand Source: LGFA and National Party 29

30 HISTORIC FINANCIAL PERFORMANCE Financials (NZ$ millions) Interest Income $10.9 $73.7 $149.1 $222.8 $278.2 $320.7 Interest Expense $9.9 $68.1 $138.9 $208.9 $262.6 $303.2 Net Interest Income $1.0 $5.7 $10.2 $13.9 $15.5 $17.5 Total Income $1.0 $5.7 $10.2 $13.9 $15.5 $17.5 Operating Expenses ($5.2) ($3.0) ($3.2) ($4.7) ($6.0) ($6.5) Net Profit ($4.2) $2.6 $7.0 $9.2 $9.5 $11.0 Liquid Assets Portfolio $52.8 $66.3 $101.7 $107.9 $266.3 $327.5 Loans to Local Government $832.7 $2,514.9 $3,742.5 $5,031.9 $6,451.3 $7,783.9 Other Assets $57.5 $107.0 $74.0 $271.9 $539.7 $380.0 Total Assets $943.0 $2,688.2 $3,918.2 $5,411.8 $7,257.3 $8,491.4 Bonds on Issue $908.9 $2,623.6 $3,825.3 $5,247.3 $6,819.7 $7,865.4 Bills on Issue $ nil $ nil $ nil $ nil $223.9 $348.2 Borrower Notes $13.2 $40.7 $61.9 $85.1 $108.4 $131.6 Other Liabilities $0.2 $0.6 $2.1 $16.1 $61.0 $92.3 Total Liabilities $922.3 $2,664.8 $3,889.3 $5,375.6 $7,213.0 $8,437.5 Shareholder Equity $20.8 $23.4 $28.8 $36.3 $44.2 $53.9 Note: As at 30 June each year or for the twelve month period ending 30 June each year. Source: LGFA Annual Reports 30

31 HISTORIC FINANCIAL RATIOS Ratios as at 30 June each year Liquid Assets / Funding Liabilities 5.7% 2.5% 2.6% 2.0% 3.8% 4.1% Liquid Assets / Total Assets 5.6% 2.5% 2.6% 2.0% 3.7% 3.9% Net Interest Margin 0.12% 0.23% 0.27% 0.28% 0.24% 0.23% Cost to Income Ratio 531.2% 53.6% 31.8% 33.7% 38.5% 36.9% Return on Average Assets -0.45% 0.10% 0.18% 0.17% 0.13% 0.13% Shareholder Equity / Total Assets 2.2% 0.9% 0.7% 0.7% 0.6% 0.6% Shareholder Equity + Borrower Notes / Total Assets 3.6% 2.4% 2.3% 2.2% 2.1% 2.2% Asset Growth n/a 185.1% 45.8% 38.1% 34.1% 17.0% Loan Growth n/a 202% 48.8% 34.5% 28.2% 20.7% Return on Equity 31 n/a 12.7% 29.8% 31.9% 26.3% 25.0% Capital Ratio 18.0% 11.9% 11.6% 11.2% 10.5% 10.9% Note: As at 30 June each year or for the twelve month period ending 30 June each year. Source: LGFA Annual Reports 31

32 HISTORIC AND FORECAST FINANCIAL PERFORMANCE Forecast performance based upon assumptions outlined in LGFA Statement of Intent The principal assumption is NZ$1.25 billion of gross issuance per year in each of , and NZ$1.1 billion in financial years. Source: LGFA 32

33 SUMMARY LGFA in operation since late 2011 Primary objective is to optimise debt funding terms and conditions for New Zealand Local Government sector Same credit rating as the New Zealand Sovereign at AA+ 31 shareholders, including the New Zealand Government at 20% Strong liquidity position supported by New Zealand Government liquidity facility of up to NZ$1 billion (currently set by LGFA at NZ$800 million as at 31 August 2017). Underlying credit quality is the New Zealand Local Government sector LGFA's obligations are guaranteed by 45 local authorities Largest domestic issuer of NZD domestic bonds (excluding NZ Government) with current outstandings of NZ$8.11 billion across eight tranches as at 31 August 2017 Regular issuance via tender 29 to 111 basis point pick up in yield over comparable NZGB maturities Rating Agency Domestic Currency Foreign Currency Date of Report AA+ (stable outlook) AA (stable outlook) 25 September 2017 AA+ (stable outlook) AA (stable outlook) 14 November

34 Appendix and Contacts

35 LGFA PARTCIPATION SHAREHOLDERS BORROWERS GUARANTORS LGFA was incorporated on 1 December 2011 with 18 foundation council shareholders and the New Zealand Government. On 30 November 2012 a further 12 new council shareholders joined bringing the total number of council shareholders to 30. (In addition to the New Zealand Government). As of 31 August 2017 there are 53 councils who eligible borrowers. As at 31 August 2017, 52 councils had borrowed from LGFA with Bay of Plenty Regional Council the only non-borrower. As at 31 August 2017, the 53 councils comprised around 97% of total council debt. There are 78 local authorities in New Zealand comprising: 11 Regional Councils 12 City Councils (including 1 unitary) 54 District Councils (including 3 unitary) 1 Unitary Territorial Authority Source: LGFA There are 45 Guarantors of LGFA. Guarantors comprise: All shareholders except the NZ Government Any non shareholder who may borrow more than NZ$20 million The only borrowers who are non- Guarantors are: Buller District Council Central Hawke s Bay District Council Gore District Council Grey District Council Northland Regional Council Opotiki District Council South Wairarapa District Council Tararua District Council The security granted by each of the Guarantors under their respective Debenture Trust Deeds secures their obligations under the Guarantee. 35

36 LGFA PARTICIPATION LGFA participating councils highlighted with year of joining Participating councils by number Source: LGFA 36

37 LGFA PARTICIPATING COUNCILS (As at 31 August 2017) Shareholders Total Shares Shareholding (%) Amount borrowed (NZ$ million) Borrowing (%) Share of Guarantee (%) New Zealand Government 5,000, % Auckland Council 3,731, % 2, Christchurch City Council 3,731, % 1, Hamilton City Council 3,731, % Bay of Plenty Regional Council 3,731, % Wellington Regional Council 3,731, % Tasman District Council 3,731, % Tauranga City Council 3,731, % Wellington City Council 3,731, % Western Bay of Plenty District Council 3,731, % Whangarei District Council 1,492, % Hastings District Council 746, % Marlborough District Council 400, % Selwyn District Council 373, % Gisborne District Council 200, % Hauraki District Council 200, % Horowhenua District Council 200, % Hutt City Council 200, % Kapiti Coast District Council 200, % Manawatu District Council 200, % Masterton District Council 200, % New Plymouth District Council 200, % Otorohanga District Council 200, % Palmerston North City Council 200, % South Taranaki District Council 200, % Taupo District Council 200, % Thames-Coromandel District Council 200, % Waimakariri District Council 200, % Waipa District Council 200, % Whanganui District Council 200, % Whakatane District Council 200, % Total 45,000, Note: Total shares includes called and uncalled shares Source: LGFA 37

38 LGFA PARTICIPATING COUNCILS CONTINUED (As at 31 August 2017) Borrowers and Guarantors Amount borrowed (NZ$ million) Borrowing (%) Share of Guarantee (%) Ashburton District Council Canterbury Regional Council Far North District Council Hurunui District Council Horizons Regional Council Kaipara District Council Matamata-Piako District Council Nelson City Council Porirua City Council Queenstown-Lakes District Council Rotorua District Council Timaru District Council Upper Hutt City Council Waikato District Council Waitomo District Council Total Borrowers Only Buller District Council Central Hawke s Bay District Council Gore District Council Grey District Council Northland Regional Council Opotiki District Council South Wairarapa District Council Tararua District Council Total Total Borrowing from LGFA Source: LGFA 38

39 LGFA PARTCIPATING COUNCILS - AGGREGATED FINANCIAL POSITION Assets (NZ$ billion) Current Assets 3.16 Non Current Assets Infrastructure Land and Buildings Investments Other Liabilities (NZ$ billion) Debt Non-Equity Liabilities Net Worth (NZ$ billion) Revenue (NZ$ million) Taxation revenue Property 4,686 Regulatory income and petrol tax 482 5,168 Sales and other operating income 1,054 Interest and dividend income 483 Current grants and subsidies 411 Total Operating Income 7,116 Expenses (NZ$ million) Employee expenses 1,660 Depreciation 1,388 Purchases of goods and services 2,729 Interest expense 642 Current grants and subsidies 769 Total Operating Expenses 7,188 Net Operating Balance (NZ$ million) (72) The amounts in this slide have been extracted from the Local Authority Financial Statistics database managed by Statistics New Zealand calculated as at June 2016 and for the June year. The data comprises the fifty-three participating council members of LGFA as at 31 August

40 GOVERNANCE STRUCTURE Central Government (20%) 30 Council Shareholders (80%) 31 Shareholders, comprising the New Zealand Government (20%) 1 and thirty councils (80%). LGFA Shareholders Council, comprising five to ten appointees from the Council Shareholders and the Government. Role of the Shareholders' Council is to: Review and report performance of LGFA and the Board; Recommendations to Shareholders as to the appointment, removal, replacement and remuneration of directors; Recommendations to Shareholders as to any changes to policies, or the Statement of Intent, requiring their approval; Update Shareholders on LGFA matters and to coordinate Shareholders on governance decisions. 1 NZ Government shareholding reduces to 11.1% if a call is made on uncalled capital of the 30 council shareholders Shareholder Council LGFA Board LGFA LGFA Board, is responsible for the strategic direction and control of LGFA s activities. The Board guides and monitors the business and affairs of LGFA, in accordance with: Local Government Act 2002; Local Government Borrowing Act 2011; Companies Act 1993; Financial Markets Conduct Act 2013 LGFA s Constitution; LGFA Shareholder Agreement; LGFA annual Statement of Intent. The Board will comprise between four and seven directors with a majority of independent directors appointed by Shareholders. 40

41 CAPITAL STRUCTURE Establishment Shares Borrower Notes Subscription Date: At establishment of the LGFA At time of borrowing Subscribers: NZ Government 20% ; Councils 80% Councils in relation to borrowings (excluding loans less than 365 days) Nature: Ordinary share (paid and uncalled) Sub debt convertible (ranks behind other lenders/creditors to LGFA) Control: Voting rights (one vote per paid in share) Non-voting Paid up Amount: NZ$25 million in total 1.6% of Council borrowing (excluding short dated borrowing) Uncalled Amount: 1 paid up : 1 uncalled for Council shareholders - $20 million in total - Return: Discretionary dividend payment LGFA cost of funds + 200bps Paid on maturity LGFA cost of funds Term / Exit: Permanent capital Exit must be to other Councils or NZ Government Capital Position (NZ$ million) Temporary capital repaid at maturity of associated Council loan In certain limited circumstances can be converted by LGFA into permanent capital NZ$ million as at 30 June 2012 as at 30 June 2013 as at 30 June 2014 as at 30 June 2015 as at 30 June 2016 as at 30 June Paid up share capital: Retained Earnings: Unpaid shares: Borrower Notes: Total Equity: Equity / Total Assets 3.6% 2.4% 2.3% 2.2% 2.1% 2.2% 1 Note Equity excludes unpaid shares Source: LGFA Annual and Half Year Reports 41

42 GUARANTEE STRUCTURE LGFA's obligations in relation to the Securities are guaranteed by the councils that are Guarantors under the Guarantee. Other than the New Zealand Government, each shareholder in LGFA must be a Guarantor. In addition any non-shareholder council that borrows in aggregate NZ$20 million or more from LGFA must be a Guarantor. The Guarantee is in favour of the Security Trustee in relation to the obligations of LGFA. Any call under the Guarantee will be allocated across all the Guarantors on a pro rata basis in relation to their rates (property tax) revenue. In addition to the Guarantee, if there is a risk of imminent default the LGFA Board can decide to make a call on guarantors equal in value to their potential liability under the Guarantee (in order to reduce the risk of an LGFA default). Parties to the guarantee able to exit the arrangement but only after: All of the exiting council s borrowings are repaid. All of the LGFA s borrowings, current at the time the council notifies of its withdrawal from the guarantee, are repaid. 42

43 GUARANTEE STRUCTURE The Guarantee is supported by : All borrowers (in aggregate of over NZ$20 million) must be a party to the Guarantee. Each Guarantor must provide as security a charge over rates (property taxes). LGFA only lends to the Local Government sector - no history of default. Structural Protections: Establishment Capital of NZ$25 million and uncalled capital of NZ$20 million. Borrower Notes = 1.6% of long dated loans to Participating Councils. KBN Norway KommuneKredit Denmark Kommuninvest Sweden Municipality Finance Finland Arrangement No direct explicit sovereign guarantee. Joint and several guarantee provided by members Direct, joint and several guarantee from members (Danish Local Governments). Municipalities and county councils that are members of the Kommuninvest Cooperative Society have signed a joint and several guarantee. No explicit sovereign guarantee. Has explicit guarantee on funding from the Municipal Guarantee Board (MGB), which is owned and guaranteed by most Finnish municipalities. Limitation Local Government borrowers guarantee own obligations only No limit No limit No limit but a pro-rata side agreement Ownership 100% owned by Kingdom of Norway. Membership by 100% Danish Local Governments. 100% owned by Swedish local governments through Kommuninvest Cooperative Society. 53.3% owned by Finnish local governments together with the Association of Finnish Local and Regional Authorities. 30.7% owned by the Local Government Pension Institutea and 16% by the central government of Finland. 43

44 COUNCIL FINANCIAL DISTRESS - MITIGANTS Local Government Framework reduces risk of financial distress no historical default by a council Council have own Treasury Management and borrowing policies most have independent advice Council financial oversight by Office of Auditor General (OAG), Audit NZ and Department of Internal Affairs Councils under Local Government (Financial Reporting and Prudence) Regulations 2014 Act required to report annually on performance against six benchmarks Rates Affordability Debt Affordability Essential Services Debt Servicing Debt Control Operations Control Six step intervention process possible by Central Government Request Information Appoint Crown Review Team Appoint Crown Observer Appoint Crown Manager Appoint a Commission Call an Election Council required to comply with LGFA lending covenants Annual attestation by council LGFA credit analysis and monitoring performed through the year LGFA credit watch-list in place LGFA not required to lend to participating councils Covenant breach is an Event of Review after 30 days LGFA can seek repayment of loans 44

45 COUNCIL FINANCIAL DISTRESS LGFA IMPACT As at 31 August 2017, 25 LGFA participating councils have external credit ratings (A+ to AA range) LGFA undertakes detailed credit analysis of each council if they apply to join LGFA (and ongoing) - not every council has been accepted as a partcipant A council default becomes a timing issue for LGFA LGFA lends secured against rates revenue under Debenture Trust Deed Unlikely to be other claimants on rates revenue given LGFA is the dominant lender to councils Trustee appoints receiver and a special rate (property tax) levied on all properties in the council region to obligations (interest + principal) when due Property taxes unavoidable and first ranking security over property If council in financial difficulty you would expect some degree of central Government intervention Sources of LGFA liquidity and additional capital Up to NZ$1 billion standby facility from NZ Government Issuance of additional LGFA Bills and Bonds Uncalled capital of NZ$20 million LGFA Board can call upon the equity commitment from councils Liquid Assets Portfolio Conversion of Borrower Notes into equity Note: central Government does not guarantee obligations of either LGFA or participating councils meet 45

46 PRUDENT APPROACH TO RISK MANAGEMENT LGFA s policy to minimise financial risks and carefully identify, manage and control all risk. Market Risk PDH limit of NZ$40,000 VAR limit of NZ$250,000 Credit Risk All Councils that borrow from LGFA are obliged to: Provide security in relation to their borrowing from LGFA and related obligations. Issue securities (bonds/frns/cp) to LGFA. Comply with their own internal borrowing policies. Comply with the LGFA financial covenants within either the Lending Policy or Foundation Policy Auckland Council is limited to a maximum of 40% of LGFA s total Local Authority assets. No more than the greater of NZ$100 million or 33% of a Local Authority s borrowings from LGFA will mature in any 12 month period. Liquidity and Funding Risk Cash and Investments LGFA manages liquidity risk by holding cash and a portfolio of liquid assets to meet obligations when they fall due. Only invest in NZD senior debt securities, money market deposits and registered certificates of deposits within strict counterparty limits. DMO standby facility The New Zealand Debt Management Office provides a committed liquidity facility up to NZ$1 billion in size that LGFA can draw upon to meet any exceptional and temporary liquidity shortfall. Currently the facility size is set by LGFA at NZ$800 million (as at 31 August 2017) Financial covenant Net Debt / Total Revenue Net Interest / Total Revenue Net interest / Annual Rates Income Lending policy covenants Foundation policy covenants <175% <250% <20% <20% <25% <30% Liquidity >110% >110% Liquidity position as at 31 August 2017 NZ$ million Cash and cash equivalents $26.7 Deposits and Marketable Securities $235.3 NZDMO Liquidity Facility $800.0 Total $1,062.0 Source: LGFA 46

47 LGFA AND NZGB CURVES NZLGFA Curve on Bloomberg: GC I737 Secondary market yields as at 21 September 2017 Source: Bloomberg, LGFA 47

48 LGFA INVESTOR HOLDING CHANGES Source: LGFA 48

49 LGFA BOND LENDING FACILITY Commenced October 2016 LGFA to issue NZ$50 million of each LGFA bond maturity to itself and hold as Treasury Stock LGFA to make available the LGFA bonds to its bank counterparties to borrow Any bond lending transacted as a repo Terms of less than 30 days Secured against cash Outstanding loans for each LGFA bond maturity at end of each month will be publicly disclosed via NZX Intention to facilitate additional secondary market liquidity in LGFA bonds not to allow for shorting of LGFA bonds Timing NZX Waivers received September 2016 Treasury systems and accounting treatment completed September 2016 Subscribe for Treasury Stock in LGFA bond tenders October 2016 tender 2021s, 2023s, 2025s and 2027s issued November 2016 tender 2019s and 2020s issued April 2017 tender 2033s issued Sixty two transactions undertaken between October 2016 and August

50 LGFA CREDIT RATINGS Fitch Ratings - November 2016 (Note: Refer to the full report for a comprehensive analysis of LGFA) Local Currency AA+ / Stable/ F1+ Foreign currency rating AA / Stable / F1+ Fitch notes: strong links to the sovereign classified as a credit linked Public Sector Entity; deemed to be of strategic importance; sound underlying asset quality of its shareholders, local councils; long-term rating is capped by the ratings of the sovereign; support of a joint and several liability guarantee. Standard and Poor s Ratings Services September 2017 (Note: Refer to the full report for a comprehensive analysis of LGFA) Local Currency AA+ / Stable / A-1+ Strengths: strong market position as a lender to New Zealand local government; extremely high likelihood of extraordinary support from the New Zealand Government in a distress scenario exceptional credit quality of the New Zealand local government sector. Weaknesses: reliance upon wholesale funding with some maturity and borrower concentration. Additional S&P research: New Zealand Councils High Governance Standards Ensure Strong Financial Management, Transparency and Long Term Planning 30 November 2015 New Zealand s Reforms Are Strengthening Council s Financial Management and Long-Term Planning 24 November 2014; New Zealand Councils: How the Ratings Capture Qualitative Differences 9 April 2014; New Zealand Councils Generally Well-Managed Liquidity Positions Support Their Credit Quality 3 February

51 LGFA HISTORY DECEMBER 2011 to JUNE 2016 Six months to June 2012 Incorporated December 2011 Commenced bond issuance in February and 2017 bonds issued Nineteen shareholders NZ$819 million of loans to fourteen councils July 2012 to June 2013 Twelve new council shareholders bringing total to thirty-one KangaNews NZ Domestic Issuer of the Year 2012 Inaugural dividend of NZ$1.5 million declared double the original business case 2019 bond issued INFINZ award for Best Bond Issue of 2012 Inaugural LGFA Borrowers Forum NZ$2.48 billion of loans outstanding to thirty-seven councils July 2013 to June 2014 New issues of 2021 and 2023 bonds NZ$3.7 billion of loans outstanding to forty-three councils July 2014 to June 2015 New issues of 2020 and 2027 bonds Bespoke lending introduced Successful refinancing of April 2015 bond maturity and on-lending Capital structure review Governance review New Treasury Management System implemented Transitioned front/middle/back office from NZDMO NZ$4.97 billion of loans outstanding to forty-four councils July 2015 to June 2016 LGFA Bonds listed on NZX in November 2015 Commenced LGFA Bill issuance Commenced short term lending to councils Governance change 2 new directors, one retirement Five new council participants join taking total to fifty councils Transitioned to Financial Markets Conduct Act NZ$6.4 billion of loans outstanding to forty-nine councils 51

52 CONTACTS Website: Bloomberg Ticker: NZLGFA Bloomberg : LGFA Postal Address P.O. Box 5704 Lambton Quay Wellington 6145 Street Address Wellington Level Featherston Street Wellington 6011 Street Address Auckland Level Albert Street Auckland Mark Butcher Chief Executive Tel: +64 (04) mark.butcher@lgfa.co.nz Andrew Michl Manager, Credit & Client Tel: +64 (04) andrew.michl@lgfa.co.nz Neil Bain Chief Financial Officer Tel: +64 (04) neil.bain@lgfa.co.nz Jane Phelan Operations Manager Tel: +64 (04) lgfa@lgfa.co.nz 52