New funding agency to issue first bonds

The newly formed New Zealand Local Government Funding Agency, which is expected to become the nation's second-biggest bond issuer after the Government, will launch its first bond issue today.

The funding agency, which was set up to act as a central borrowing vehicle for municipalities, will offer $50 million of April 2015 bonds and $250 million of December 2017 bonds at a tender scheduled for 2pm. The LGFA intends to issue $1 billion of bonds in its first year.

The LGFA was set up last year to consolidate the local government issuer market, which in the past has involved up to 80 participants issuing relatively small amounts of debt.

The Treasury has estimated that local government borrowing could rise from $6 billion to $10 billion in the next five years, which would help to strengthen New Zealand's capital markets.

The Bank of New Zealand, in a research note, said the pricing of Wednesday's issues would ultimately be derived by supply and demand, not just the bonds' credit rating of AA plus.

The bank said it expected the bonds to trade at a "decent premium" to New Zealand Government bonds.

"We think at the outset 80-110 basis points (bps) for the 2015s and 110-140 bps for 2017 is not unreasonable," BNZ said.

But the bank said that the LGFA target of funding at 50bps or under to their government equivalents in 2012 and 2013 "appeared quite ambitious".

The bonds will be issued through a similar tender process used by the NZ Debt Management Office, which manages the Government's bond tender programme. The Debt Management Office will manage the tender process.

The bonds will not be explicitly guaranteed by the Government, which is similar to the policy for Australian semi-government bonds.

There is a joint guarantee built into the legal framework of the LGFA, which will mean the councils have joint liability if an individual borrowing entity is unable to meet their obligations.

However, the rating agencies consider an implied government guarantee when assigning their rating.

The New Zealand Government is forecast to borrow $13.5 billion to June this year and $12 billion to June next.

As it stands, the Government bond market is worth $52.5 billion. By comparison, the LGFA's goal is to have almost $5 billion in issuance by the end of the decade.

BNZ said local demand is expected from three prime sources: institutional fund managers, retail investors and financial institutions.

"The appeal of these bonds to retail investors will be the strong rating, implied government support, simple vanilla format that match government bond maturities and local parochial appeal," BNZ said.

The LGFA also expects its issues to attract global interest.

Auckland Council has committed to undertake 30 per cent of its borrowing through the LGFA.

BETS RAISED ON GLOBAL GROWTH

AMP Capital Investors, which manages $12 billion worth of assets, has increased bets on global growth, saying share valuations look attractive, even in the face of Europe's debt crisis.

"We think it is time to add some growth exposure to our portfolios and we now have a small overweight to global shares," said Keith Poore, head of investment strategy and portfolio management at the company's quarterly briefing.

"Further stability on the eurozone front would see us consider adding to this position."

In the three months ended December 31, AMP Capital holdings of global equities returned 8.1 per cent hedged, or 4.7 per cent unhedged, the best return of any asset class behind global property with a 8.4 per cent return and Australian equities which returned 6.3 per cent. By contrast, global fixed interest returned just 1.3 per cent.

"Looking ahead for 2012 and beyond, we expect shares to outperform bonds by a healthy margin," Poore said.