interest.co.nz on today’s Dunedin City bond issue

Simply…

DCC bond issue 8.10.14 [interest.co.nz]

### interest.co.nz October 8, 2014 – 04:00pm
Post by David Chaston
A review of things you need to know before you go home on Wednesday; record beef prices, new Wtgn quake faultline, fewer home loan approvals, Dunedin borrows $70 mln, swap rates fall
Link

Crap!

Tweets:

What if Dunedin (@whatifdunedin) tweeted at 10:09 PM on Wed, Oct 08, 2014:
@sue_bidrose news today Dunedin City is doing more borrowing – to be precise, it has issued $70 million of bonds at 4.88% #laughorcry :(

Sue Bidrose (@sue_bidrose) tweeted at 10:14 PM on Wed, Oct 08, 2014:
@whatifdunedin yep – money comes off term borrowings and gets refixed. Not new borrowings – our debt continues to decline (very slowly)

What if Dunedin (@whatifdunedin) tweeted at 10:18 PM on Wed, Oct 08, 2014:
@sue_bidrose unfortunately, it’s gone out on interest.co.nz website as MORE borrowing so Dunedin City has a little PR problem

Sue Bidrose (@sue_bidrose) tweeted at 10:21 PM on Wed, Oct 08, 2014:
@whatifdunedin Thanks. Bugger.

Updated post 13.10.14 at 10:55 a.m.

Total debt of the council group of companies was $621 million on June 30.
Move saves city $1 million a year in interest on seven-year loan.

### ODT Online on Mon, 13 Oct 2014
City debt overhaul to save millions
By David Loughrey
Dunedin is set to save $7 million after better economic times meant the city council was able to renegotiate a $75 million loan. Council company Dunedin City Treasury has renegotiated the loan through ANZ and Westpac.
Read more

Posted by Elizabeth Kerr

11 Comments

Filed under Business, DCC, DCTL, Politics

11 responses to “interest.co.nz on today’s Dunedin City bond issue

  1. Elizabeth

    Bonds to the anonymous wide boy Habitual Investors again……….

  2. Whippet

    Where do we apply to get a piece of the action?

    • Elizabeth

      Remember the days when Invercargill City issued at 16%…. I’m getting old.

      • Cars

        Elizabeth, when ICC was paying 16% on its bonds I was paying 33% on my mortgage, around 1984. The sobering thought is that we are entering those days again and if we merely get to 8%, I would be prepared to bet the interest rate swaps undertaken by the DCC would cause total insolvency or revolution.

  3. Martin Legge

    If the DCC and DVML were commercial businesses, these issued bonds would likely be considered corporate junk bonds and therefore have to pay a higher rate of interest for the risk of investing. The only reason they are not considered junk bonds is because the issuer and the investor knows the DCC will always ensure the Dunedin Ratepayer will be forced to underwrite and honour the deal as Mayor Cull has made so clear.

  4. Call Security

    That is a great twitter exchange.

  5. Elizabeth

    Updated post

    ****

    Dunedin City Council – Media Release
    Renegotiated bond issue to save $1m

    This item was published on 10 Oct 2014

    Dunedin City Treasury this week renegotiated a $75m loan that will save the DCHL Group (which includes the DCC) around $1 million in interest costs per year. Dunedin City Treasury manages the funds and long term debt of DCHL and the DCC. Total Group debt, which includes the DCC, was $621m at 30 June 2014. The Group had a $75m loan on fixed interest that was due for renewal, but the overall reducing debt requirements, meant that a smaller loan of $70m was now required. This fact, coupled with a reduced rate of interest for the debt means the group will save at least a million dollars a year for the period of the loan. Treasury Manager Richard Davey says it is a bit like renegotiating your mortgage. Through ANZ and Westpac we have arranged a better deal by paying a lower interest rate over a longer period. “Spreading the maturity date of the Group’s loans, helps improve the average long term cost of the debt.” The next significant maturity date will be in October 2015.

    Contact Group Chief Financial Officer on 03 477 4000.

    DCC Link

  6. Hype O'Thermia

    Is it “a better deal by paying a lower interest rate over a longer period” or is it the same total amount, just takes longer? I’m not sure what they mean, is it overall $-more, $-less or $-same? .

  7. Rob Hamlin

    The release was regurgitated and expanded on the front page of the ODT today. It is an interesting effort. My comments are appended.

    http://www.odt.co.nz/news/dunedin/319409/city-debt-overhaul-save-millions

    “Dunedin is set to save $7 million after better economic times meant the city council was able to renegotiate a $75 million loan. Council company Dunedin City Treasury has renegotiated the loan through ANZ and Westpac.
    Dunedin City Treasury manages the funds and long-term debt of the council group of companies, Dunedin City Holdings Ltd, and the council. The move will save the city $1 million a year in interest for the seven-year term of the loan. The total debt of the group was $621 million on June 30.”

    Negotiated through ANZ and Westpac – through the multi option variable rate note facility (MOVRNF)? $1 million a year is equivalent to about a 1.3% reduction – that’s a lot. Seven years is a long time – longer than most bonds issued by the DCC to date. Is this the life of the bond, or the life of a floating rate/cross currency swap commitment that we may have been signed up for via the MOVRNF in exchange for a fixed stream of bond repaymants of possibly shorter maturity?? Is this $7 million saving a concrete figure, or just an estimate that is subject to re-adjustment if things don’t work out as planned over the life of the commitment?

    “Council chief financial officer Grant McKenzie said the group had a $75 million loan on fixed interest that was due for renewal, but reducing debt requirements meant a smaller loan of $70 million was required. Along with a reduced rate of interest for the debt, the group would save at least a million dollars a year for the period of the loan.”

    There was a report of a $70 million bond issue last week, is this the same debt? The $5 million reduction is irrelevant because, as Calvin has pointed out, this $5 million of debt (plus 15 more) has been ‘saved’ by drawing down cash reserves which presumably were generating interest before they were pulled down. The passage above notes that the previous debt was on fixed interest, there is no mention of fixed interest on the ‘cheapie bargain loan’ that it has been refinanced with. If it’s a fixed for floating rate swap through the MOVRNF, then this would be the expected outcome as reduced initial cost = more long-term risk.

    “Council treasury manager Richard Davey said the move was “a bit like renegotiating your mortgage”. The group had arranged a better deal by paying a lower interest rate over a longer period. “Spreading the maturity date of the group’s loans helps improve the average long-term cost of the debt.”

    Now this is a bizarre statement – examination of all rates, including mortgages, show a rising interest rate with longer maturity as interest rates in the US and elsewhere are expected to rise next year and thereafter – how has DCTL managed to buck this trend? One area where reduced interest rates for longer terms might be available is if you are prepared to swap a fixed rate for a floating one – eg a bank might be willing to refinance your fixed rate mortgage for a floating rate at an initially lower interest rate – if you are prepared to take that additional long term risk. Ditto if you are prepared to swap a fixed bond coupon rate for a variable rate interest repayment commitment. Ditto plus some of you take on additional currency and capital repayment risks.

    “Mr McKenzie said ANZ and Westpac took the loan to the market on the group’s behalf. “The key thing that has happened is the market has softened since the last deal was put in place five years ago.” Mr McKenzie said five years ago the world was in the middle of a recession. The other factor that made the situation better was Dunedin was seen “a very attractive option”. The council has a Standard and Poor’s AA/Stable/A-1+ rating, the city had good security, and was seen as “a good place to invest”.

    To which market did ANZ and Westpac take it might I ask – the bond market, or the swaps market? The reduced cost for longer commitment suggests the latter. I have no doubt that the other side of ANZ and Westpac’s contacts rolodex do see it as a very attractive offer, as it is backed by the capacity of creditors to sting ratepayers to the tune of DCTL’s on call capital commitment from the DCC – a potentially immediate liability which the DCC does not have the negotiable assets to meet – but we do, unfortunately. S&P’s opinion is irrelevant in light of this capacity to pass the shit on to us, although it does of course reflect this unfortunate reality. I am not sure that the market has softened since 2009 for high quality debt – rather the opposite in fact – it was very hard to find in 2009. On a general basis gamblers become more interested in their partner’s capacity to fund their losses if they expect to win – big time.

    All in all it’s an interesting statement, as much for what it doesn’t say as for what it does. I believe that it might be consistent with this scenario:

    1) DCC has $75 million of bond debt maturing.

    2) DCC draws down $5 million of its own cash reserves to make debt trends look good, leaving a $70 million residual debt refinance requirement.

    3) DCC refinances by issuing $70 million of bonds on fixed coupon (4.88%?) maybe for seven years, but maybe for a shorter term (as reported last week?).

    4) DCC then swaps this fixed repayment commitment in NZ dollars (via the MOVRNF) for a variable rate repayment commitment possibly also denominated in foreign currencies. As this is much riskier over the long term, the initial repayments are initially much lower than the bond coupon payments they were swapped for. Committing to these floating swaps for a very long period (eg seven years) makes this even risker and as a result the initial ‘buy in’ rate even cheaper.

    5) DCC P.R. debt then issue a press release for front-page coverage to the plebs announcing this arrangement as an ‘amazin bargin’.

    I would be reassured that it was truly an ‘amazin bargin’ by answers to four questions that this release does not provide:

    For the amount that the DCC is actually liable to pay on an annual basis:

    1) What is the initial rate of interest payable on this debt?
    2) Is it fixed for the full term of the loan and for the full amount of it?
    3) Is it denominated in New Zealand dollars?
    4) Does it involve interest rate swaps or other derivatives?

    I think it’s worth noting that the financial and investment markets generally don’t do ‘amazin bargins’.

  8. Calvin Oaten

    Rob poses some very interesting questions which need to be answered to clear the unknowns. For me, the scary bit is getting the ‘amazin’ bargin’ in return for the longer term. The longer the term the more exposure to interest variations. As these have been at rock bottom for a long time, it would only be reasonable to expect increases over time. Therein lies the rub. Do the banks know a trend they are not telling? Methinks the old game of ‘heads we win tails you lose’ that the banks always play should raise the warning signs. But then, perhaps it’s a case of beggars can’t be choosers.

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