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N.Z. City Bond Seller Considers Debut Offerings in Europe, U.S.

New Zealand’s newly formed municipal debt agency, forecast to become its second-biggest non-bank bond issuer, may carry out the first foreign sales of regional notes to cut costs as cities boost borrowings.

The Local Government Funding Agency, set up to sell bonds on behalf of New Zealand’s councils, may offer notes in Europe and the U.S. private placement market, Chairman Craig Stobo said today. Regional authorities including Auckland and Christchurch may more than double outstanding debt to NZ$11 billion ($8.6 billion).

Cities and towns across New Zealand are betting investors will find their bonds more appealing after sovereign yields dropped to records. New Zealand government debt returned 13.1 percent to investors this year, the best after U.K. bonds across 26 markets tracked by Bloomberg. The LGFA, incorporated Dec. 1 to buy councils’ securities and issue debt under its own name, expects to match New Zealand’s AA+ score from Standard & Poor’s and Fitch Ratings, the second-highest level, Stobo said.

“It will be an attractive investment in the current investment climate when people are looking for security and a pickup in yield,” Stobo said in an interview. “That will be attractive to larger institutions, bank balance sheets and global investors.”

City councils had been banned from selling debt abroad.

New Zealand lost its AAA grades on local-currency debt at Fitch and S&P in September, which both cited concern about the nation’s fiscal burden. The local-currency rating was reduced one level to AA+, the same grade as the U.S., and the foreign-currency rating was cut to AA from AA+.

Auckland Bonds

The local government for Auckland, the nation’s most populous city, sold NZ$100 million of 5.79 percent 2017 bonds in April, which yielded 4.917 percent as of Dec. 5, according to Australia & New Zealand Banking Group Ltd. prices and data compiled by Bloomberg. That compares with 3.565 percent on the New Zealand sovereign bond due the same year, the prices show.

“These entities are very secure borrowers,” Grant Hassell, head of fixed income at AMP Capital Investors, said in an interview. “They have got all sorts of ability to tax homeowners and effectively take possession of homes as security, and there is also an implicit level of government support.”

Some investors in municipal debt may be disadvantaged by the new setup, Hassell said. Many of New Zealand’s investment managers aren’t able to own more than 10 percent of a single entity and amalgamation will restrict their choice of councils, he said.

Yields Dropping

Auckland, whose debt is rated AA, led municipal bond offerings in New Zealand this year, selling NZ$690 million of debt, according to data compiled by Bloomberg. Average government yields fell 174 basis points, or 1.74 percentage points, this year to 3.55 percent on Nov. 16, an all-time low, Bloomberg/EFFAS indexes show.

The LGFA is owned by its municipal authority borrowers and the government, Stobo said in the interview last week. More than 20 councils have expressed interest in joining the existing 18 member shareholders, which would give the agency the bulk of New Zealand’s local government borrowings, he said.

The agency has appointed Phil Combes, treasurer of the New Zealand Debt Management Office, as chief executive officer. He will move to the role early next year.

Municipal authorities in New Zealand have about NZ$5 billion of bonds outstanding, according to Stobo. The combined 10-year borrowing plans of those councils amount to about NZ$11 billion, he said.

The central government has NZ$65.2 billion of bonds outstanding, according to data compiled by Bloomberg.

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