A decade of development for LGFA

Mark Butcher, chief executive at New Zealand Local Government Funding Agency in Wellington, surveys the agency’s track record over its 10-year history as an issuer and looks ahead to future development – including its ambitions in sustainable finance as it builds assets for a potential green-bond debut.

The New Zealand Local Government Funding Agency (LGFA) was created 10 years ago and has reached the stage of being a mature issuer, with a substantial New Zealand dollar bond curve and a diverse global investor base. LGFA now provides funding for more than 70 councils and 95 per cent of sector debt. What are the highlights of the past decade?

The biggest achievement has been to have established a vehicle that has consolidated the borrowing activities of 74 borrowers to create a yield curve of high-grade liquid bonds for domestic and offshore investors. Councils and investors have benefited.

We were surprised to achieve scale so rapidly. Initial projections were of peak debt of around NZ$5 billion (US$3.3 billion) outstanding so it is very pleasing to be approaching NZ$16 billion of bonds on issue.

Part of the growth has come from strong offshore investor support, which peaked at 40 per cent early on – when our amount on issue was lower – and now sits at 30 per cent. The listing of our bonds the NZX Debt Market (NZDX) satisfied one of the Capital Markets Development Task Force recommendations; we are now the largest issuer on the NZDX and comprise about 9 per cent of its turnover.

How has the mix of LGFA investors changed over the past decade and the past year?

The highlight has been the response to our investor strategy with a significant deepening and broadening of our investor base over the decade. Our early investors were largely banks and domestic investors, and then this became more diversified with offshore investors after three years or so. Today, each group accounts for roughly a third of holdings.

Sustainable finance is on the agenda for LGFA including potential labelled issuance in future. What have the developments been so far?

Last year was big for us but in the sense of what we are doing internally rather than issuing bonds with a GSS [green, social and sustainability] sticker attached.

The highlights in this context are that we appointed a head of sustainability, established a sustainability committee to provide independent advice to the board and management, achieved carbon zero certification and established a GSS lending programme for councils. We have made our first loans to councils at a discounted margin under our GSS lending programme.

The Three Waters reform will create new water entities that are owned by councils but which take assets off councils’ balance sheets. What is the likely impact for local government and the LGFA?

The reforms are a key piece of central government policy and are likely to proceed in mid-2024 provided central and local government can agree on the governance and ownership model.

Councils will see the Three Waters assets and liabilities transferred into new entities. These currently account for around 35 per cent of councils’ balance sheets. Councils will still have other activities such as roading, public transport, and social and cultural amenities to manage.

How has the COVID-19 pandemic affected LGFA’s funding operations?

COVID-19 has had a very limited impact on councils’ financial positions, largely because property tax revenue continues to grow. The impact has only been felt by certain metropolitan councils – with a loss of public transport revenue, as people work from home, and a reduction in patronage revenue from events and facilities.

Sector borrowing has been in line with forecast, if not slightly higher, as councils seek to continue their investment in infrastructure. LGFA has taken the opportunity of strong market conditions to over-fund, building up liquid assets to ensure we have a liquidity buffer to meet future funding requirements if markets experience a downturn.

What is the outlook for longer-tenor issuance?

We have 12 bond maturities across a 16-year curve, so we can fill in the gaps, extend our yield curve or increase the volume of each outstanding tranche.

While our preference is to extend our curve by issuing longer tenors, councils do not have a strong appetite to borrow longer: they typically borrow for an average term of six years. This is frustrating as councils have assets with a life of more than 30 years but do not borrow to match them.

We run a mismatch between our weighted average term of bond issuance and lending to councils of more than one year, which is a conservative approach to asset-liability management and precludes us from issuing longer.

We have a cap of NZ$1.75 billion per maturity to reduce refinancing risk. We may well have to consider whether we should lift this given the breadth and depth of investors in LGFA bonds.