The Securities (Local Authority Exemption) Amendment Bill is in the select committee stage in the parliamentary process to pass it into law. Only five submissions have been made to the select committee and all are supportive. When the exemption from the Securities Act is passed in February/March Local Government debt issuers will be able to issue fixed rate Bonds and Floating Rate Notes to retail investors without the hassle of a full prospectus (a short-form investment statement is still required) As commented in our July 2007 “Treasury Broadsheet” publication, local authorities are expected to borrow an additional $30 billion from the local investor market over the next 10 years. Whether there is the capacity in the market to absorb $3 billion of net new issuance each year remains to be seen. Over the last 3 years local authority issuance has been $0.5 billion in 2005, $1 billion in 2006 and just over $0.5 billion in 2007.
The Auckland Regional Council alone has a requirement to borrow up to $800 million over the next six years. The heavy flow of retail investor funds out of discredited finance companies into bank deposits over the last six months has been considerable as sharp lessons are learnt about yield return and credit risk trade-offs. Local Government wholesale debt trades at a margin above wholesale bank swap interest rates, therefore Mum & Dad retail investors can expect to receive retail investment yields above bank retail term deposit rates. Everyone is a winner, as the local authority borrowers are potentially accessing lower cost funding than the previous dependence on the wholesale investor placement market. Moves are afoot by financial service providers to have a retail securities register and paying agency facility available to borrowers for an annual basis point cost.
The New Zealand Stock Exchange is keen to list all the retail securities on the NZDX to provide transparent price discovery and up to date information on secondary market trading activity. Initial legal advice is that existing local authority bonds and FRN's already issued to the wholesale market will be able to be easily converted to retailable status by a simple signed declaration from the issuer and approval by the current investors.
The recent dislocations in global/local credit and debt markets has increased local government credit spreads as wholesale investors and bank investors become more discerning. Over the first half of 2007 the average issuance margin (spread) across all maturities from 2 to 12 years was 16 basis points. The average spread in the second half was 27 basis points, with nothing issued beyond 5 year. We expect to see more Local Government issuers obtaining a Standard and Poor's credit rating this year.