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Council debt covenants change proposed

LGFA debt change proposal to be decided on next month

A proposal by the Local Government Funding Agency (LGFA) to lift the quantum of its debt covenants to provide more choices and capacity for member councils to raise more debt is welcomed by LGNZ, which says it will provide councils and ratepayers with more options for the economic recovery of their regions.

The proposal will allow rated councils with a long-term credit rating of ‘A’ equivalent or higher to reach a net debt to revenue ratio of 300 percent by 2022, which would then reduce over time to 280 percent by 30 June 2026.

The council association says it will give councils greater headroom to co-invest in priority projects with the Government and Crown Infrastructure Partners, as well as assist ratepayers and business owners with greater flexibility around rates.

“Even before Covid there was a lot of discussion about raising debt caps. In many cases growth councils, in particular, have the ability to service more debt, that can be used to develop vital infrastructure needed to tackle our housing and transport challenges,” says LGNZ president Dave Cull.

“Councils primarily invest in long-term infrastructure, and borrowing through the LGFA has never been cheaper, so we welcome these proposed changes.

“This is not to say rated LGFA member councils will immediately go and take on more debt – it’s for each rated council to decide on, considering that more capital expenditure will result generally in greater opex costs.

“As we and others have pointed out, the funding and financing framework for local government is flawed because although councils own about half of the infrastructure in New Zealand, they only receive 10 percent of all taxation revenue to support that infrastructure.

“So while we welcome the proposal of the LGFA because we’re in exceptional times, the long-term solution to the deeper issue is to broaden local government’s revenue base and so address the funding imbalance between local and central government.”

The proposal

The board of LGFA reviewed the foundation policy financial covenants set out in its foundation policies and will recommend to shareholders at a Special General Meeting to be held next month (June) to amend the net debt/total revenue foundation policy financial covenant that applies to local authority borrowers with a long-term credit rating of ‘A’ equivalent or higher.

The proposed changes to LGFA’s foundation policies requires approval by a majority of shareholders.

The proposed changes were discussed with S&P Global Ratings Australia, Fitch Australia and LGFA’s Shareholders’ Council. Currently, local authority borrowers with a long-term credit rating of ‘A’ equivalent or higher are required to maintain net debt/total revenue below 250 percent, unless a higher ratio is approved by shareholders.

In respect of this financial covenant, the proposed changes are: For the current financial year ending 30 June 2020, 250 percent to continue to apply; for the financial years ending 30 June 2021 and 2022, 300 percent will apply; and for each of the next four years financial years, a decrease of five percent until 280 percent will apply for and from the financial year ending 30 June 2026.
There are no other changes proposed to LGFA’s foundation policies such as any of the other foundation policy financial covenants that currently apply to the thirty local authority borrowers with a long-term credit rating of ‘A’ equivalent or higher.

There are also no changes proposed to any lending policy financial covenants that currently apply to 37 local authority borrowers who do not have a credit rating.
The LGFA organised an investor conference call on May 5 to provide an update on the impact on local government sector finances from the pandemic and outline the proposed changes.



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