Long-suffering "mum and dad" retail investors will have better access to high-quality local government bonds by early next year after legislation passed yesterday setting up a "bond bank" which will borrow money on behalf of local authorities.
The Local Government Borrowing Bill passed its third reading yesterday supported by all parties in Parliament.
By facilitating the establishment and operation of a new organisation - the New Zealand Local Government Funding Agency - the bill would assist local authorities to borrow funds at lower interest rates than they could at the moment, Local Government Minister Rodney Hide told Parliament.
The new agency will also be able to borrow overseas, which councils cannot do.
"The operation of the agency will also strengthen New Zealand's capital markets by providing a new high-quality investment option. The scheme is a win-win for local government and for investors." Hide said.
About 50 local authorities had indicated that they would participate in the scheme.
The agency's bond issues will be conducted by Treasury's Debt Management Office but the bonds themselves will not be government-guaranteed.
AMP head of fixed income Grant Hassell said he and his team had already begun preparing to invest in the new bonds.
There were about 80 different local authorities each with their own borrowing requirements and raising money themselves, often borrowing from banks.
"But with the pressures being put on the banking sector it makes a lot of sense for these councils to come together and fund it collectively. These are entities that have a great deal of security behind them. Not only can the local council increase someone's rates, effectively tax homeowners, they can take possession of the house if the worst comes to the worst and increase someone's mortgage."
Local authority bonds were currently rated anywhere between AA for the good ones down to unrated but the new agency's bonds were expected to end up with a AAA rating.
Hassell said there had been little market discussion about the returns on the new bonds but an individual local authority borrowing money for five years at present would pay about 1.5 per cent above the current 3.95 per cent benchmark swap rate for the same term.
Hassell expected there would be a secondary market for the bonds allowing investors to sell them before maturity.
Business Herald financial columnist Mary Holm said the new bonds could be an attractive alternative to bank term deposits, which are very popular with retail investors who are fearful of investing in shares or finance company debentures.
"People are going to be weighing up the returns versus bank deposits and whether or not you can get out of them before maturity, which obviously with bank term deposits is not easy to do. With these if you can sell them that's going to give people more flexibility."
However most retail buyers of bonds tended to hold them to maturity, Holm said.
Craig Stobo who is chairman of the funding authority's establishment board, believed the bonds were a "terrific opportunity" for retail investors.
He hoped the authority would be up and running before the end of the year and issuing its first bonds shortly after that.
The New Zealand Local Government Funding Agency Ltd:
* Will issue bonds to raise cash on behalf of local authorities.
* Borrowing by local authorities is expected to rise from $6 billion currently to $10 billion.
* The bonds will be offered to institutional and retail investors.
* Local Government NZ estimates the funding agency will save local government about $25 million each year.