DCHL financial result

NO-ONE BELIEVES TERRY DAVIES ON DVML RESULT AND FORECAST (when DVL debt is deliberately not mentioned)

Terry Davies (1) 194022

Dunedin City Council – Media Release
DCHL Annual Result for the year ended 30 June 2014

This item was published on 30 Sep 2014

The Board of Dunedin City Holdings Limited (DCHL) is pleased to report the financial result for the DCHL group for the year ending 30 June 2014.

● Profit after tax for the group was $12.5m.
● We have distributed to the Dunedin City Council (DCC) and its subsidiaries outside the DCHL group a total of $15.7m. This has fully met budget expectations and been achieved within the policy of not borrowing to pay dividends.
● Cash from operations remains strong at $30.1m. This was after paying the budgeted subvention payments of $7.9m to Dunedin Venues Limited.
● Total borrowings across the group have reduced by $4.7m to $621m.
● The financial result for the year reflects the hard work and focus of the staff and directors of the DCHL group of companies, which is much appreciated.

Profit after tax for the group was $12.5m for the year compared to $20.5m last year. This is a solid return for the year. The main difference between the 2014 and 2013 profit resulted from the 2013 year including a write up of approximately $7m in the value of the City Forests investment.

Aurora Energy Limited had a solid year, but profit was $1m less than last year due to the mild winter in 2013. Operating cashflow remained strong and was $4.1m higher than last year. 2014 also saw the company starting to increase investment in its asset base.

Delta’s profit was at a similar level to last year ($4.4m this year vs $4.6m last year). It has completed exiting its water and civil construction operations.

City Forests has had a strong year. Profit has reduced from $14.6m to $8.3m. This reduction in profit has been due to a lower write-up in value of the City Forests investment in the current year. The company paid a record dividend to Dunedin City Holdings Limited of $5.1m.

Taieri Gorge Railway experienced a small loss for the financial year of $51,000 compared to a surplus of $39,000 achieved last year. Operating cashflow remained strong at $433,000 and was also higher than last year.

Cash from operations has remained strong at $30.1m. Cashflow is the most critical measure as it is the basis for dividends and capital investment. The solid cash generation performance has also enabled the DCHL group to lower its net debt by $4.7m over the year.

Progress has continued to be made in restructuring the governance of the group. A number of directors resigned during the year and we need to thank them for their services. We need to specifically record the service of two directors who resigned this year after serving as members of the group’s board of directors for a significant number of years. Both Ray Polson and Ross Liddell resigned as directors during the year and contributed in a significant way to the development of the DCHL group in a wide range of roles. It is with sadness that I must note the passing of Ross in July of this year.

Given the normal operational challenges facing the members of the group the board of DCHL remain positive on the outlook for the group of companies.

Contact Graham Crombie, DCHL Chair on 0274 363 882.

DCC Link

### ODT Online Tue, 30 Sep 2014
‘Solid’ results from DCC companies
By Chris Morris
The Dunedin City Holdings Ltd group of companies have delivered “solid” results, despite an $8 million drop in profits and another loss for the entity running Forsyth Barr Stadium, chairman Graham Crombie says.
Read more

Posted by Elizabeth Kerr

*Image: Ch39 30.9.14 [screenshot tweaked by whatifdunedin] – Terry Davies


Filed under Business, DCC, DCHL, Delta, DVL, DVML, Economics, Media, Name, New Zealand, People, Politics, Project management, Property, Stadiums, What stadium

64 responses to “DCHL financial result

  1. Elizabeth

    It’s confirmed, on the basis of what he says re time and money for DVML in this video – Terry Davies is an utter meathead. Conveniently leaves off mention of the appalling debt level at DVL, which ratepayers OWN.

    ### dunedintv.co.nz September 30, 2014 – 7:19pm
    Good news, Bad news: DCC companies reveal financial performance reports
    The Dunedin City Council’s business arm has revealed its latest financial performance. Dunedin City Holdings Limited has made a $12.5m profit in the last financial year. And while that’s good news for the council, the results aren’t as positive for another of its companies.

  2. Mike

    You know they could make more “profit after tax” if they charged DVL the full market rate rates for the rugby stadium (because they could claim back the tax on it).

    • Mike

      (on further thought to be fair it wouldn’t show up here – it would show up on DCC’s books as the recovered rates less a drop in the DCHL dividend to the city which would be lower by the amount of rates paid less the tax not paid on the lower DCHL income)

    • JimmyJones

      No, that wouldn’t make any difference. If DVML paid the full rental of about $16 million to DVL, DVML would make a bigger loss, and DVL would make a smaller loss. There would be no change for the ratepayers. The subsidies and the total losses would be the same.

      It looks like Sue Bidrose intends to not require DVML to pay the $4 million rent to DVL. This will be a boost to DVML’s profit and a boost to DVL’s losses, but she will tell us that all the problems are solved. This will be another big, fat stadium lie.

      • Mike

        No I’m talking about the rates bill that the stadium doesn’t pay (the council charges them a minimal amount rather than the amount that a for profit business on the same land would be charged) not the ‘rent’ (the ‘rent’ isn’t actually rent, it’s the remains of the money being paid from the luxury boxes that at one point pretended to be ‘private fundraising’; the city had to take out a special loan because CST couldn’t raise that money, this is supposed to be paying that off … of course originally it was supposed to be $5m+ now somehow it’s dropped to $4m and soon I guess to $0).

        Ideally, the DCC should charge DVL (not DVML, it’s the landlord that pays the rates) as much as they can for rates without triggering the ire of the IRD that way they can take the largest tax deduction for the paid rates as possible.

        Of course doing this smart thing that would benefit the city’s finances the most would make DVL/DVML’s financial positions look even worse. Even though the city would be better off by tens of thousands of dollars it’s something that would not be politically viable, too many people would be embarrassed.

  3. JimmyJones

    The DCHL press release claims to have been written by DCHL chairman Graham Crombie, but there are giveaway signs that the DCC’s Spin-doctoring Department produced it. It’s not just the hyper-optimism, but also the repeated use of the words “strong” (5 times) and solid (3 times). In actual fact the annual profit decreased from $20.5 million to $12.5 million. This is a 39% drop in profit. More appropriate words would be “profit plunges”, “train-wreck” and “downwards spiral”.

    As examples of what happens in the real world, outside the DCC and ODT’s virtual-reality bubble, here is a headline from the Herald: “Qantas profit plummets 30 per cent” and in May we could read that: “Vijaya Bank Net Profit Plunges By 39%”. This word-for-word copying from DCC press releases is typical, but shameful behavior from the ODT and reporter Chris Morris. It is shameful because it is bad journalism and because it is dishonest.

    • Elizabeth

      ttrpt, JimmyJones

    • Hype O'Thermia

      … “strong” (5 times) and solid (3 times)
      Strong, as in odour of longdrop in midsummer.
      Solid, as in concrete between the ears.
      Journalism, as in infomercial.

    • Cars

      Not quite, the accounts which should and could have been criticised is where last year Hudson wrote up the forests by $7 million.

      The real issue here is the overall performance, what company would be happy with $12.5 million dollar turnover with $621 million worth of debt, described as a good year.

  4. Elizabeth

    Terry Davies adds colour during the Ch39 broadcast tonight….

    FBS logo 194119Terry Davies (1) 193746Terry Davies 194034

  5. Rob Hamlin

    DVL’s interest rate swaps are almost certainly denominated in overseas currencies. We have recently had a slight fall in the NZ$ which means that these swaps will now move against us. I would suspect that the much heavier more recent falls have yet to show in the numbers. Things could look mucky in next year’s DCC accounts, even if the NZ$ stops falling, which it probably won’t. The muck may be a bit thicker as the Council promptly spent the dead cat’s bounce ‘profit’ in the swaps this year, rather than leaving it in the ring to put against the three previous years’ much larger losses and the inevitable future swap losses.

    • JimmyJones

      Rob and Mike: The value of DVL’s Interest rate hedging securities increased in the 2014 financial year by $2.8 million, and in 2013, by $3.3 million. The year before was a decrease of $8.8 million.
      Our accounting system requires that these changes in value are included in the comprehensive income (profit). The way the DCC uses these assets means that their value should be ignored as a contribution to profit.
      The DCC buys the securities to create fixed interest loans. These securities cost a lot and add greatly to the final interest rates of the loans. Also their value varies over time according to interest rates and (I assume) currency cross-rates. These changes in value are of no consequence to us because the city won’t be selling them, they are kept for the term of the loan and then they expire. Their value is irrelevant except that purchase price affects the interest rate of the loans. Forget about them. The size of the ongoing losses including the subsidies are more important.

  6. Mike

    Looking more at the 2014 DVML accounts the most interesting thing is the “subvention payments” – Aurora and City Forests are making $1.229m of subvention payments directly to DVML (not DVL) which is then paid back to DVL as part of the $4m in rent.

    This money-go-round makes DVML’s loss look a lot less ($58k rather than $1.287m).

    Now we know that city companies are supposed to be making subvention payments directly to DVL and in fact the DVL report lists $7.754m directly from Aurora – however $1.229m makes a dog-leg through DVML’s books to make it look like it almost broke even – the real headline in the ODT this morning probably ought to be “DVML loses over a million dollars”.

    (finally it’s kind of funny that DVML goes out of its way to not include the rent it pays DVL in its operating expenses, while DVL happily includes it in its operating income).

    • Mike

      BTW this isn’t the first year that subvention payments have gone the long route through DVML to DVL, it is the largest, it means that in previous years DVML lost a lot more than we thought.

      • Elizabeth

        Mike, if time and inclination suggest you email every councillor and the mayor – and Terence – with your observation on the dog-leg subvention payment facts as you state here.

        • anonymous

          Yes the subvention payments are significant. From the annual reports there are two lots of subvention payments (payment of taxable income to a loss making company within the same group) of $7.754m to DVL plus $1.229m to DVML total $9m ($8.4m from Aurora and the rest $0.6m from City Forests) I don’t think the ODT has quite grasped the magnitude of that subsidy. And it is certainly handy for the Stadium proponents to have profitable DCC businesses which they can lean on, to keep the illusion of everything tracking to “budget” within the Venues companies.

        • Mike

          Well the subvention payments are in some sense a good thing, being able to avoid the tax on that money (by keeping it DCHL and avoiding the taxable moment of passing it to the DCC) is inherently a good thing – it does save the city money.

          What’s wrong here though is having that money take a dog-leg through DVML to DVL to make DVML’s books look much better than they should otherwise be.

        • JimmyJones

          I agree with anonymous, the subvention subsidies are very significant ($9.0 million total) because the amount is large and it is a drain on DCHL, and therefore a drain on the city. These subsidies are also helping to disguise the real size of the losses of DVL+DVML. It is DCC policy to not acknowledge these payments as subsidies; “subvention payment” sounds a lot nicer, they think.

          Also the DCC stadium misinformation policy requires that the DVL+DVML profits are stated after we have paid the bastards their big subsidies. This give a much rosier impression. Because of a quirk in the accounting system, they can legally do this (probably). The effect of this dishonesty is that the stated annual losses of DVL+DVML are meaningless because the size of the losses is largely determined by the DCC’s decision on how much subsidies are paid. Both companies could be made to look like they are profitable if they decided to pay them a big enough subsidy. The profit figures we see are largely a DCC decision and not so much an indication of the financial health of the companies. They have decided that the high profile DVML will make a small loss, and that the seldom mentioned DVL makes a large loss.

          If we clear away the smoke and mirrors, DVML lost $1.29 million in 2014, and DVL lost $12.29 million – a total of $13.58 million. There is a tax benefit because of this large loss of 28%, which reduces the loss to $9.78 million. There are various other costs and subsidies which increase the annual total cost to the city.

          The thing to note is that DVML’s stated loss is only $58,000, but the true loss is $1.29 million. DVL’s pretend loss is $4.54 million, but its real loss is $12.29 million. The losses of the stadium companies are understated by a dishonest $$8.98 million for 2014. The misinformation from hiding the subvention subsidies is another big fat stadium lie. Most DCC councillors and the Mayor seem to be aware of this and seem untroubled with the dishonesty involved.

        • JimmyJones

          Mike: the subvention payments are in no way a good thing. They are a deception to hide the size of the ongoing losses of their stadium. If you are saying that it is good that a tax adjusted loss of $9.78 million is better than a non-tax adjusted loss of $13.58 million, then I agree with you, but as a way to make money, it is a failure. Having one broken leg is better than having two broken legs, but still not a good thing.

          There is nothing wrong with ratepayers paying extra, so that DCHL can pay DVML a subsidy, which is passed on to DVL which is passed on to DCT. The devious route is not the problem, it is the hidden nature of the subsidies that is the real problem, $1.229m for DVML and $7.754m for DVL. I mean the fact that the subvention subsidies are hidden from the average citizen is more important than the devious paths that the subsidies take.

        • Mike

          Jimmy yes I’m saying that using the loss to reduce the tax bill is a good thing – not that having to pay subvention payments is a good thing … remember what would happen to that money if we didn’t have to pay the stadium debt … it would be showing up on our rates bills as a rebate.

  7. Anonymous

    Solid. As in “solid waste”.

  8. Elizabeth

    DCHL profit down but mood bullish
    The Dunedin City Council’s group of companies remain in a bullish mood, despite an $8 million drop in profits and another loss for the entity running Forsyth Barr Stadium.

  9. I haven’t yet read the DVL and DVML reports. But I have seen this mornings ODT. Terry Davies has ‘got it in one’. “A business that’s turning over $9 million revenue, versus a $4 million rental, is not sustainable.” DUH!? Where did he get that epiphany from? The back of a Kornies packet? Go to the back of the class Terry, put on the ‘dunce hat’ and start looking at the ‘job vacancy columns’.

  10. Elizabeth

    At least the ODT took the numbers well.
    Terry Davies’ body language told a different story last night, a nervous complexion for that mirror.

  11. Elizabeth

    Channel 39 !!!!
    Don’t forget crime is NOT down at DCC (Citifleet, City Property, Water….), DCHL (Delta, City Forests….) or at Deloitte (for unethical, protectionist crimes against the ratepayers….).
    And please, don’t mention DCC’s potential million-dollar insurance claim for the Citifleet losses. Council may try to pretend, under claim, that it didn’t know about the car fraud YEARS and YEARS AGO – it did. Internal communications prove it, as well as that little matter of DCC covering up the fact that Brent Bachop operated multiple Council credit cards !!!! Thus, in reply to an official information request (LGOIMA) for Bachop’s credit card history, the Finance department headed by Athol Stephens knowingly only revealed a history for ONE card. Oh yes, how truth and falsehood are contained.

    So, Ch39 please re-script this:

    Southern Police District records drop in crime
    October 1, 2014 – 6:28pm
    There’s been a 5% drop in recorded crime throughout the Southern Police District in the last financial year. Statistics New Zealand released its latest recorded crime data today. It shows there were 6,684 recorded offences in the district. That’s down from just over 7,000 in the previous financial year.
    Read more

  12. Jimmy and Mike; forgetting about the tax benefits which seem to be of mixed value, as the ratepayers would have seen the tax paid value in dividends into the city coffers (but for this ‘rort’), or the money would have stayed in the companies’ hands for in-house debt mitigation. What really ‘grots’ me is that not only are the companies and the ratepayers being shafted, but of the total of $8.983m delivered to the DVL/DVML losers, $8.352m went straight to the banks as interest. Benefits? This despite the injection of an additional $1m from the DCC on top the previous year’s $1m.
    Then in their comments the DVL directors stated that they were quite comfortable in the knowledge that they still have access to uncalled capital of $165.311m. Guess where that comes from if and when needed, as it most certainly will once the maintenance costs kick in as they will soon.
    As a matter of interest I asked via an OIA request for the energy costs of the stadium with a separated out detail of the fan costs to maintain inflation of the roof and side walls. The total energy cost for the year was $230,000 including $27,000 for the roof/walls plus an annual warranty agreement in place with the supplier which costs $29,700pa. So there we are, just on $260,000pa for energy alone. A lot of bums on seats to cover that.

  13. Rob Hamlin

    That would be nice if it was true JimmyJones, but I don’t think that it is. The accounts are very difficult to read, but all the debt threads lead back to DCTL and its ‘multi-option variable rate note facility’. If you are a large, secure and and relatively unsophisticated borrower (read DCC for this) and want a fixed and predictable rate of interest, then it’s perfectly easy – issue a bond at public auction and it will be priced by the lenders in an open market, all risk inclusive, for a fixed set of interest payments and repayment of principal at term.

    The DCC does indeed issue bonds, but these bonds then appear to be subsumed/consumed by this black box that dwells within DCTL – the ‘multi-option variable rate note facility’. According to Google nobody else on the planet has one of these – which in and of itself should make the Dunedin ratepayers who are committed to pay for this facility via $850 million of ‘on call’ capital to DCTL nervous. It has been stated at Cr Thompson’s public fora that this facility involves some form of interest rate swap deal system with DCTL and three banks. All you have to do JimmyJones, to see if these things are as safe as you suppose, is to Google: ‘city interest rate swap’. Here are Google’s ‘top ten’ (of 909,000) for this search term:

    1) “Los Angeles seeks exit from interest rate swaps that could cost city millions more on its debt”

    2) “Oakland City Council Joins Fight Against Toxic Interest Rate Swaps”

    3) “Interest-Rate Deals Sting Cities, States”

    4) “L.A. council votes to pressure two banks to redo interest rate swaps”

    5) “Detroit Allowed to Pay UBS, BofA $85 Million to End Swaps.”

    6) “Los Angeles City Council wants out of 22-year interest rate swap deal”

    7) “Detroit closer to exiting bankruptcy after swaps deal approval”

    8) “How Interest Rate Swaps Are Crushing America’s Cities”

    9) “Wave of US Municipal Bankruptcies Caused by Wall Street Predatory Interest Rates, not Pensions”

    10) “Banks Have Interest Rate Swapped $20 Billion From Taxpayer Pockets”

    Two of these give good accounts of how it works – read them:

    “Interest-Rate Deals Sting Cities, States”


    Wave of US Municipal Bankruptcies Caused by Wall Street Predatory Interest Rates, not Pensions”


    Just to show that it is not a US phenomenon – this from Wikipedia’s entry on interest rate swaps:

    “British local authorities

    In June 1988 the Audit Commission was tipped off by someone working on the swaps desk of Goldman Sachs that the London Borough of Hammersmith and Fulham had a massive exposure to interest rate swaps. When the commission contacted the council, the chief executive told them not to worry as “everybody knows that interest rates are going to fall”; the treasurer thought the interest rate swaps were a ‘nice little earner’. The controller of the commission, Howard Davies realised that the council had put all of its positions on interest rates going down; he sent a team in to investigate.

    By January 1989 the commission obtained legal opinions from two Queen’s Counsel. Although they did not agree, the commission preferred the opinion which made it ultra vires for councils to engage in interest rate swaps. Moreover interest rates had gone up from 8% to 15%. The auditor and the commission then went to court and had the contracts declared illegal (appeals all the way up to the House of Lords failed in Hazell v Hammersmith and Fulham LBC); the five banks involved lost millions of pounds. Many other local authorities had been engaging in interest rate swaps in the 1980s, although Hammersmith was unusual in betting all one way.[4] This left a train of cases, where generally the banks lost their claims for compound interest on debts to councils, finalised in Westdeutsche Landesbank Girozentrale v Islington London Borough Council.[5]”

    Other countries, such as Italy, have similar issues.

    You will note in the Wikipedia entry here that the ratepayers were let of the hook by the British courts, who ruled that the deals were unlawful and therefore unenforceable. Do not look for such relief here. When the citizens of Kaipara looked like they were going to wriggle off the Banks’ debt hook in a similar manner, the then and future National government passed RETROSPECTIVE legislation to make the unlawful lawful and thus enforceable against these innocent parties, who had no knowledge of the unlawful deals they were being committed to.

    If you’re still not convinced, ask yourself why the banks who are the other parties in this ‘multi-option variable rate note facility’ demanded (and got) absolute security of $850 million from you and me via this DCTL on call commitment when the debt held by DCTL under this debt arrangement is predicted (by the Council of course) to peak at $650 million or so. Why the extra $200 million? – I know it’s not much by DCC standards (only some $4,000 extra per ratepayer). Do those that requested this extra ‘over and above’ security know something that we don’t?

    That actually wouldn’t be hard, because, JimmyJones, even though you and I and 50,000 other people are personally liable to the tune of $15,000 plus per head for it, we actually know absolutely nothing about what goes on inside this ‘multi-option variable note facility’, although I suspect that none of the options are actually ours. We don’t know who we have swapped with, in what currencies, over what time span and under what terms – some swaps can involve principal, so if your swap partner (there could be hundreds of them within the reswap network) goes under, you can get to pay your liabilities and theirs, interest and principal – Ugh!

    These things do not self correct, they do not cancel out, they do not generate paper losses (and profits), but real ones – and they can be massive – maybe enough to ruin us, and make a number of other parties stinking rich in the process. I have for a number of years now, held the opinion that it is this inscrutable facility within DCTL, rather than the FB Stadium that represents the primary threat to the financial stability and wellbeing of this community. Money after all is not lost, as any finance company investor will tell you, it just goes ‘somewhere else’ – forever.

    I may be wrong, and I hope that I am. But when you examine the track record of cities and interest rate swaps transactions with third parties worldwide, and then look at the outcomes of this specific city’s business transactions with third parties over the last ten years, there is a degree of consistency of ‘winners’ and ‘losers’ within these transactions that means that I am not in the least reassured.

    Go back to Wikipedia’s ‘city interest rate swap’ top ten.

  14. Hype O'Thermia

    This record of bumbling full steam ahead with interest rate swaps is just like crashing its way through local opposition to build the Fubar Stadium.

    In both cases information about the risks and failures in other centres all around the world were easily available. But nobody seems to have done a simple Google search, nobody followed up with more detailed examination of why stadiums lose money, why interest rate swaps are not suitable for anyone / any organisation that can’t afford to lose if it turns to custard.

    Why does the council and its manager caste put so much faith in paid consultants and in advocates pushing their own barrows? Is it laziness? Is it endemic gullibility? Is it because people who charge a lot for advice must be wise in proportion to their price whereas Google info is free >> worthless? Is it because one’s very very good friends (!) and fellow club-members wouldn’t put you crook?

  15. Rob, you are the most erudite person on the planet when it comes to the intricacies of the “interest rate swap” business. I say business because that is exactly what it is. No sentiment, no prisoners, just cold calculated programmes to transfer the most capital possible from the people to the few oligarchs centered on Wall St. And never forget, our illustrious Prime Minister, he with the enigmatic smile is one of that fraternity. Beware, be very aware. The plans of these ‘gangsters’ are starting to move into place. Note the frothy shifting of currency rates around the planet as we speak. That of course is the trigger to set in motion the biggest IRS games and watch the minnows get swept down the drain. Guess what type of fish the DCC represents?
    Meanwhile we see Dave’s “ten ten ten” economic development plan is crashing in flames with the latest news of the Donaghys retrenchment of jobs. All part of the whole comprehensive web of deceit of the ‘money moguls’. Rob, I am sure would agree.

    {Link added. -Eds}

    • Call Security

      Access to Wikipedia certainly makes one erudite. Not all interest rate swaps are created the same. I’m sure Rob has been told this before but never mind full steam ahead.

      • Elizabeth

        Accepted. However, Wikipedia does move with the times too… the now broad church of its user base and contributors including, for example, provision of lay, semi-professional and professional opinion on the description of medical conditions, as well as introduction and mention of array of treatments for the commonly experienced and rare, is nothing to snigger at.

        Wikipedia is simply an evolving directory, but be educated and questioning of it simultaneously as you make use of it… whether it might lead you to Google Scholar or case history and precedent elsewhere online or direct to sources off the internet… it’s a starting place for enquiry.

        In my opinion, Rob’s concerns have some foundation as laid over the essential message that ratepayers do urgently need transparency for the money vehicles the city council opts to expose ratepayers to — soundly, recklessly or otherwise.

      • Hype O'Thermia

        Wikipedia isn’t the beginning and end, just the beginning. Google and Wikipedia give a quick “smell test”. If everything smells good except the clearly loony-fringe links thrown up in the first couple of pages of a search engine it’s probably not worth investing time in further examination, unless you’ve already heard hints that there is something beneath the surface. Interest rate swaps and stadium profitability searches should arouse even the most obtuse councillor to query advice given in person by people who may have other reasons for pushing these schemes. So – gullible, lazy, corrupt? Any other suggestions?

    • Mick

      you say:-
      ‘Meanwhile we see Dave’s “ten ten ten” economic development plan is crashing in flames with the latest news of the Donaghys retrenchment of jobs.’
      He will simply employ 10 times more staff on the DCC payroll to achieve this – writing Economic Strategies, Work Management Plans, Hazard Avoidance Strategies and Plans etc for the private sector to follow ad infinitum – not a problem – what’s not to like? A great leap forward.

      {Link added. -Eds}

  16. Rob Hamlin

    Hype, it can go one step further. The case of JP Morgan and Jefferson County, Alabama being the best known. Oddly enough, like Kaipara, this involved unlawful transactions swaps and sewer projects – Unlike Kaipara the banks got pinged plus some – no retrospective stuff to save the suits.

    A link to the story:


  17. Rob Hamlin

    You are quite right Call Security. The bigger ones are individually tailored by their vendors to suit the retail circumstances and the target – That’s the problem with them.

  18. Call Security

    Kaipara’s interest rate swap issue was very specifically related to the fact the terms of the swap did not match the terms of the debt. This likely caused ineffectiveness in the swap which impacts the accounting treatment. The real cost to Kaipara was the fees they had to pay to break the swap and that is an expensive business (on top of the fees they had to pay to enter into the swap). On top of that under the terms of the swap they were paying a fixed rate interest which would have been helpful if floating rates went up but they actually went down quite a lot so they were paying more interest on the swap then they would if they had left themselves on a floating rate. You also need to keep in mind the swap also contributed a comparatively small amount to Kaipara’s already large debt issue. How necessary these swaps really are is debatable but this type of swap is not posing the risk that you are making out. The article you linked to says you should not make sweeping generalisations based on isolated events, if you take that to mean you should seek more transparency in what DCC is doing then fine but it feels a lot more like you are just trying to connect invisible dots to prove the DCC’s swaps are going to cost us tens of millions.

  19. JimmyJones

    The DCHL 2014 Annual report is now available – only one day late. Most of the DCHL subsidiary companies are also available – but DCTL is missing. Link: http://www.dunedin.govt.nz/your-council/dunedin-city-holdings

    • Elizabeth

      JJ – surely the DCTL report not being posted is a silly oversight by lowly staff and infernal upload issues at computer. Or. It needs careful massage and framing for release. To be cynical like that.

      • JimmyJones

        Yes, Elizabeth, I have heard of those computer issues – “the file is too big” etc.
        That reminds me of when Sue Bidrose’s department was promoting the destruction of the southern one-way system. She was telling us that the traffic modeling for the vandalized roading system showed that the changes would cause “no loss of network efficiency”. At the time of the annual plan submissions there were a dozen pdf reports about the roading vandalism, but the Gaibites-Porter traffic modelling report was mysteriously missing, until after submissions closed. When it appeared, the report revealed that the changes would cause serious congestion in the near future (down to Level Of Service “E” in places). Gaibites-Porter told the DCC that they needed more traffic lanes. This was a polite way of telling them that the project was (and is) a complete failure, given that the main feature of the project was to remove some traffic lanes. Anyway if Sue Bidrose ever told the truth, it would be by accident.

        • Elizabeth

          Thanks JimmyJones – not good, what on earth is DCC thinking!?!? (re SH1 one-way system, to privilege a mere few property owners, NOT the general populace who wish to move themselves and freight through the city. efficiently….).

  20. Rob Hamlin

    An isolated event….!!!!!? – Good grief! This from the Daily Telegraph (how many sources/countries do you want, Call Security?)

    “The FSA estimates that more than 40,000 interest rate swaps were sold to SMEs over the last decade. Including fixed-rate loans would increase the potential number of businesses impacted by the mis-selling of interest rate derivatives to more than 100,000, according to industry experts.”


    100,000+ victims in just this one report – How many ‘isolated incidents’ do you consider makes a trend, Call Security?

    • Call Security

      Isolated event was a quote from an article that you provided, an article I wonder if you even read because you clearly did not pick up the substance of what the author was writing about.

  21. Rob Hamlin

    Oh yes, one thing, Call Security, this isn’t just 100,000 interest rate swaps that have accidentally gone wrong/moved unexpectedly – This is 100,000+ that have been mis-sold (that means actively misrepresented to the targets), by what are supposed to be large and supposedly respectable financial institutions.

    • Call Security

      And again you link to another article that you haven’t comprehended properly. 40,000 interest rate swaps and then a further 60,000+ embedded derivatives in fixed term loans, this is not 100,000 interest rate swaps. Do you have any idea how many interest rate swaps are sold globally? Are we supposed to presume that 40,000 is all of them? Some of them? A few of them? A large number of Councils have these instruments and yet the only real loss that occurred in the time period where you’d expect there to many was a break fee at KDC.

  22. Call security; another isolated event might have been the dairy farmers who were hooked into IRS deals which threatened to bankrupt them. As Rob says, there are just too many world wide pending, to be classed as isolated events.

  23. Rob Hamlin

    We return to one of your comments Call Security:

    “it feels a lot more like you are just trying to connect invisible dots to prove the DCC’s swaps are going to cost us tens of millions.”

    As of the end of the last reporting period, the estimates published by the DCC in their own accounts (which one would imagine would be as optimistic as possible) indicate that the DCC has already lost 25 (10 x 2.5) million plus over the last four years on interest rate and currency swaps.

    The relevant dots are not invisible, but they are faint – cryptic figures well after page 100.

    • Call Security

      You fail to understand how these things are being accounted for. This is not a loss in the way you understand it and besides the current figure would be $18.5m not $25m which was the figure in 2012. In 2013 the DCC had a cash flow hedge reserve of ($18,568) and a corresponding financial instrument liability of $18,574 (I would have thought those numbers should match but nevertheless). These balances are likely made up of many hedges and throughout the life of the hedge the balances will go up or down when they are fair valued. When you get to the end of the hedge’s life the hedge will get closed out by putting the liability and reserve to zero, provided these two balances match there is no real gain or loss on the hedge. Basically whatever you are calling the loss will be offset by a future “gain” by the time the hedge is closed out. Could DCC have been sold unfavorable hedges? Sure they could. But the loss is not what you are saying it is, the loss will come primarily from whatever break fees exist on the hedge.

  24. Elizabeth

    Random items proving nothing, or something….

    Related Post and Comments:
    5.11.12 Afternoons with Jim Mora: The Panel today [DCC interest rate swaps]

    Kaipara District Council and IRS:

    ### stuff.co.nz Last updated 05:00 08/12/2013
    Debt worsened by rate swap
    By Rob Stock
    KAIPARA WOES: Kaipara District Council has had a massive debt blowout.
    A report into the massive indebtedness of a North Island council found that its woes were exacerbated by an interest rate swap sold to it by Dutch investment bank ABN Amro. Until last year, when the Commerce Commission started investigating the sale of interest-rate swaps to farmers, claims of mis-sold swaps seemed to be a European and US phenomenon.


    ### NZ Herald Online 5:14 PM Wednesday Apr 2, 2014
    ComCom defers action on interest rate swaps
    By Hamish Fletcher
    The Commerce Commission has deferred its call on whether to lay proceedings against three banks involved in its interest rate swaps investigation as it is assessing new information in the cases. The regulator said in December that it anticipated filing legal action against ANZ, ASB and Westpac by March this year over their sales of interest rate swap contracts to rural customers. These swaps, according to the commission, are a financial derivative product that allows a borrower to manage the interest rate exposure on their borrowing. While traditionally offered to corporates, the commission says from 2005 they were offered by some banks to rural customers throughout New Zealand. In August 2012, the commission began looking into whether these interest swaps were misleadingly marketed.

    Auckland Council:

    ### interest.co.nz September 6, 2013 – 04:58pm
    Auckland Council borrows NZ$300m through 15-year Norwegian bond, takes offshore borrowing to NZ$819m
    By Gareth Vaughan
    Auckland Council has issued bonds in Norway, well known for its fiords.
    The Auckland Council has borrowed 1.4 billion Norwegian krone, (about NZ$300 million), through a 15 year bond issued to Norwegian institutional investors, which lifts its offshore borrowing to date to roughly NZ$819 million. Mark Butcher, Auckland Council’s Treasurer, told interest.co.nz the Norwegian bond issue stemmed from “reverse inquiry” to the Council via HSBC. “We were approached by HSBC, which is one of our banks, saying they had some Norwegians interested in the Council name, in the Council credit, and would we be keen to issue to them,” Butcher said.

    ### interest.co.nz Updated August 30, 2012 – 11:09am
    Auckland Council reports NZ$233 mln annual loss after tax; Has now lost NZ$343 million after tax in its first 20 months
    By Gareth Vaughan
    The Auckland Council lost NZ$233 million after tax in its first full year of operation with the lion’s share of the loss blamed on unrealised costs stemming from fixing future interest rates at current low levels. The council has now lost NZ$343 million after tax in its first 20 months of operation. […] A council spokeswoman told interest.co.nz the NZ$167 million hit to the bottom line from interest rate swaps on loans stemmed from a combination of new swaps and swaps inherited from legacy councils. She described the contracts as “forward starting fixed rate paid (borrowing) interest rate swaps.”

    • Call Security

      Kaipara’s $70m debt was made $900k worse by a break fee, seems like a drop in the bucket of their woes really but yes it did make their debt worse. What is it you think those other articles are telling you? I could probably go and find dozens of articles on dog attacks and use them to make a case that we should get rid of all dogs.

      • Elizabeth

        I wasn’t making a case.

        All you need to think about is DCC’s exposure on $850 million of ‘uncalled’ capital – then read some more about the GFC in your spare time, if it helps.

        Before I put a bullet into your mongrel, metaphorically.

        • Call Security

          I think you might be referring to the $850m multi option facility? The 2013 Annual Report would suggest that $850m is not exposure but the borrowing limit DCC has on the facility. The exposure would be the current borrowings against that facility of $622m. The $850m uncalled capital has probably been issued by DCC to DCHL in order to secure that facility but I don’t think that means that is what DCC’s exposure is, not until DCHL borrows up to that $850m limit anyway.

        • Elizabeth

          Let’s keep prodding into this and the three big banks involved.

  25. JimmyJones

    Rob Hamlin: I accept what you say about the obscurity of DCTL’s interest rate hedging. While the objective is to remove the risk of interest rates increasing, there remains the risk of DCTL making a bad mistake when creating the hedges. Although I think this is a low risk, DCTL’s obscurity increases this risk.
    I question the wisdom of creating these fixed interest rate loans because of the huge cost. The current DCC annual plan specifies that hedged lending will be at 7.30%. Compare that to DCTL’s borrowing costs before adding the cost of the hedging – a recent (16/11/2013) DCTL bond was issued at 5½%, and recent floating rate loans are now costing it about 4.4%. The difference between 7.3% and 4.4% is many $millions per year of extra costs.
    Another reason why the DCC interest rate is so high is because of the subsidized interest rate for lending to DVL and DVML and DCHL’s shareholder loan. These subsidized, low interest rate loans mean that normal DCC lending is at an artificially higher interest rate. In other words, we all pay extra for the bridges, bicycle lanes and other projects and this extra is a sneaky stadium subsidy. This practice helps to hide the size of the real annual cost of the stadium and it is dishonest.

  26. Rob Hamlin

    Been away for a few days.

    The $850 million is on call capital – that means if the company’s creditors demand it, then the shareholders must pay in. That is why it is known as ‘on call capital’. It is a guarantee not a credit limit. Although a credit limit (facility) may require a guarantee, they are not the same thing. The landscape is littered with the carcases of individuals and companies who have failed to make that particular distinction, or have been smoothtalked into thinking there isn’t one.

    We were told at Cr Thompson’s first public meeting, Call Security, that this on call capital was used specifically in order to circumvent the Local Government Act’s prohibition on Councils extending ratepayer backed guarantees to CCTO’s or outside concerns. The need for such a ban should be obvious to any fiscally literate individual, the irresponsibility of the DCC in deliberately circumventing this ratepayer protection should be equally so.

    In lay terms:

    $1,000 credit limit – The bank let you borrow $1,000 dollars.
    $1,000 on call capital (guarantee) = You don’t owe the bank a cent, but they can demand that you pay them $1,000 tomorrow – no ifs or buts.

    Call Security, if these wonderful things always balance out of their own accord as you say, then why did Kaipara willingly pay such a large amount (for them) to get out of one? That simply shouldn’t be necessary in your world. But it’s actually small beer compared to some of the get out of jail tickets that have been paid to get out of these supposedly self-correcting marvels.

    As for the banning dangerous dogs quip. I think that everybody would agree that an outright ban on credit default swaps and collateralised debt securities would have been a good idea before they blew the World away in 2008, despite all the hot-shot economists saying up to the moment of disaster that they were wonderful – Ditto interest rate swaps now.

    • Call Security

      You are talking about two different things. Note 11 DCC has $850m capital in DCHL that is uncalled. Note 14 the group has an $850m multi option facility. Obviously the uncalled capital in DCHL is the security the banks require to make the loan facility available to the group but this does not present a real exposure to DCC of $850m because if DCHL defaulted on the debt DCC would be on the hook for the amount DCHL has outstanding not the amount they have available. I have no issue with your complaints about DCC circumventing the LGA which is a fair complaint.

      Kaipara would have paid the break fee because someone would have run the numbers that told them it was cheaper to pay the break fee and move to the lower floating interest rates than to stay on the fixed rates they were paying under the terms of the swap. Not all interest rate swaps work in this same way but you have just grouped them all together like they are the same thing. From what I could see, though often information is limited, most of the catastrophic swaps that you have linked to are not the same type DCC is using.

      I am not asserting that DCC should or shouldn’t be using these devices just that your interpretation of the losses and risk is not accurate.

  27. Rob Hamlin

    I am afraid that I believe that my interpretation of potential risk is accurate. The amount of capital that can (must) be called by DCTL will be determined by the contracts that define the ‘multi-option variable rate note facility’ (MOVRNF), not by the level of DCTL debt outstanding – unless this restriction on call obligations has been been put in as a specific clause (would we be so lucky?).

    As it appears that DCTL has the only MOVRNF on the Planet, and no details of its mechanics are available from them, we know nothing other than the fact that our maximum exposure is $850 million under this one particular arrangement. We don’t even know if this $850 million includes existing ratepayer exposure to bonds, or is in addition to it.

    I come back to the fact that the DCC Group’s total debt is forecast to peak at c. $650 million, but that this on call capital security required by the three banks behind this MOVRNF is for $200 million more than that. Over the years I have seen some very unpleasant things done to naive borrowers by banks. A common sign that a ‘sting’ is in the offing is when a security that is well beyond the value of a borrower’s predicted peak debt is required from a third party without specific reason for this ‘over and above’ security value (the parents’ family home is a popular target). It’s a ‘red flag’ that indicates a further careful look at supposed outcomes is required before signing to the bank’s proposal.

    I am interested in your comment:

    “From what I could see, though often information is limited, most of the catastrophic swaps that you have linked to are not the same type DCC is using.”

    Can you tell us more about what you know/can see about this? – I have never seen anything published about the individual swaps within the MOVRNF that would allow a categorisation of their nature/risk relative to any others, catastrophic or otherwise, to be made.

    • Call Security

      My belief is the swaps will be floating to fixed swaps and this is probably the case based on the values being carried in the balance sheet. With the number of floating rate bonds DCC has on issue their risk is that interest rates go up and they have to pay more. So the interest rate swaps mitigate this risk by changing the interest rate from floating to fixed, while adding another risk. Obviously the additional risk is that they lock in a fixed rate that ends up much higher than where floating rates go – that is what happened to Kaipara. From what I have read Hammersmith and the Italian authorities were doing fixed to floating rate swaps so they are likely not relevant examples to be sighting.

      However, the American situation is very similar as they were also doing floating to fixed swaps so if you want to provide lots of links provide those ones. But it is still important to glean information from the articles to understand the circumstances. One big point is that the US authorities are all unhappy that they are stuck paying fixed interest under the swaps when they could get much lower floating interest rates. In that respect it isn’t much different from me fixing a mortgage at 8% only to see the interest rates fall down to 5%, bad luck right? The actual cash flows haven’t changed but what has changed is that they could now get interest rates significantly lower and that is what they are unhappy about. Is that the bank’s fault? It could be if they didn’t give you good advice which is what the US authorities are trying to push. But you have to remember they wouldn’t have complained at all if interest rates were to increase and they were reaping the benefits (something they did throughout the 1990s and 2000s).

      The US were also able to access lower interest rates through the federal intervention which furthered this gap between the fixed rate they were paying and the rate they could get. You also have the fact that many of these swaps are for long periods of time, 20+ years, the longer the time period the bigger the break fee to get out of the swap.

      A few more of these articles show outright fraud with collusion between the bank and an authority’s employees. Could that be happening at DCC? You’d probably say yes. I’d say probably not.

      Any risk to DCC is on the swaps taken out before the interest rates fell when they would have locked into rates higher than where the floating rates have gone. It could well be that DCC are paying interest that is much higher than floating right now but those interest costs are already being paid so it isn’t like they are on the verge of a massive bubble exploding.

      My interpretation of some of these things could well be wrong but all I have stressed throughout here is that you don’t just assume that DCC is on the hook for this catastrophic event because you read some articles saying interest rate swaps are bad.

  28. Rob Hamlin

    Floating to fixed implies that the DCC issues floating rate bonds and then tries to fix them by hedging. I don’t think that they do, as they appear to have a listed coupon rate for each bond issue in the accounts – including the latest at 4.88%. It was this point and the fact that this secret group of ‘habitual investors’ had (have) the inside running to acquire these assets at purchase prices not fixed by the open market via public auction/placement that caused so much agitation some years back. The swap-related hedging claims made to date also seem to relate to short term (monthly) borrowings.

    If this is indeed the case for the longer term debt, then this would be a fixed to floating situation – Why would the DCC do this? Well, one motive is that a prime measure that they are bumping up against is their loan repayment to revenue ratio. When the stadium was being peddled they were really stretching the elastic on that one. One way of trying to borrow more than you ought, but to still duck underneath this hurdle is to issue bonds and normal, but then swap out expensive low risk fixed bond coupon commitments into a initially cheaper but riskier long term variable rate commitment – that’s even easier if you also take the additional currency fluctuation risk to acquire access to USD of GBP or EU denominated debt.

    Another thing to note is that in an ongoing arrangement such as the MOVRNF it is possible for the swap commitments to actually exceed the life of the bonds that they are originally swapped against, causing a forced refinance situation. If this were indeed to be the case, then MOVRNF sourced money would be even riskier – but consequently initially even cheaper.

    Losing on variable to fixed is painful enough, but it does have a cap that is the spread between your (higher) fixed and (lower) variable commitments. Going fixed to variable plus currency fluctuation exposure, as I suspect is the case here, has no ceiling to how badly you can get stung in the longer (and maybe very much longer) term. If the NZD halves in value, then our commitments double, and that’s without factoring in the forecast rise in US interest rates.

    I am still very interested in your beliefs/sources Call Security, as they don’t appear to match up with the pitifully small amount that we do actually know – Do you know something specific that we don’t – Can you give us some more information?

  29. Russell Garbutt

    The exchanges in this thread are fascinating, and all but incomprehensible to those that are not familiar with finances. But it all boils down to some simple premises I suppose. If you borrow money, then you own money. If you borrow a lot, then you owe a lot. If you borrow some more money to pay back the first lender and get even more complex then it all starts to look like a Ponzi variation with the same end results. I’m reminded of that Dickens line about income being a pound and spending being 19/6, result being happiness and income being a pound with spending a pound and sixpence, result misery. Only difference here is that the Dunedin ratepayers are those that will be forced to front up with the necessary sixpence except that it looks like the sixpence has turned into about $850m.

  30. Elizabeth

    ### ODT Online
    New look for railway operation
    By John Lewis on Thu, 23 Oct 2014
    Taieri Gorge Railways will roll down a new track this weekend, by rebranding as Dunedin Railways. For more than 35 years, the Taieri Gorge Railway and the Otago Excursion Train Trust have been taking tourists on scenic rail trips up the Taieri Gorge, and more recently up the coast, north of Dunedin on the Seasider.
    Read more

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