Healthy lobbying by ourselves and others has led to the Government announcing a welcome change to the law and regulations around Local Govt issuing debt securities to retail investors. The Government is restoring an exemption that Local Govt debt issuers had before 1998 under the Securities Act disclosure regime. Prior to 1998 debt securities could be issued to retail investors without the cost and hassle of a formal prospectus document. Since 1998 it has been more cost effective for Locals to issue debt by private placement to the wholesale investor market. As a consequence Mum & Pop retail investors could not easily access safe and secure Local Govt debt securities. The failure of a number of bottom-end finance companies in recent years has highlighted the need, not only for investor education about risk and reward, but also reducing the barriers of entry to superior quality fixed interest investments.
The Auckland City Council has been the only Council to raise funds directly from the public under a prospectus over the last nine years, and that was arguably not the most cost effective option for that issuer at the time. The new disclosure requirements for Councils issuing debt securities to the retail market will be an Investment Statement, together with a Certificate signed off by two Councillors. Previously a full prospectus needed to be signed by all Councillors. Commerce Minister, Lianne Dalziel stated that, when announcing the restoration of the exemption, Local Government authorities will be spending $30 billion on infrastructure development over the next 10 years, thus access to a wider source of funding options is very desirable.
In making the change, the Government pointed to the significant level of information disclosure Councils are already required to make in respect to their finances, plans and prospects. The changes to the law will be made in the “Securities (Local Authorities) Amendment” bill planned for later this year. Most Councils issuing debt securities do so under a Debenture Trust Deed that provides a charge over rates revenue as the security.
Institutional and wholesale investors who have enjoyed semi-Government risk at investment margins well above the sovereign government debt curve (i.e. above bank swap rates) should be pleased with the added liquidity provided to this debt market. However a continuation in the compression of margins above swap also has to be expected. With the new regulatory framework for finance companies requiring credit-ratings, the Mum & Pop investors will now clearly see big differences in the credit quality of Councils vis-à-vis finance companies. Interest rates offered will reflect the differing qualities of credit.