Auckland in New Zealand and Switzerland do not, at first sight, appear to have much in common. So Auckland Council’s decision to issue its first offshore public bond issue in Swiss francs naturally took some explaining. The decision marked the culmination of a two-year process, which began shortly after the New Zealand government merged eight local authorities into Auckland Council. “The transition happened in November 2010 and it was done to create a more efficient and cost-effective organisation,” says Auckland Council treasurer Mark Butcher.
Auckland accounts for 32% of New Zealand’s population and 37% of its gross domestic product, so it plays a dominant role in the country. It is also growing fast, with the population of the region expected to increase from 1.5 million to 2.4 million over the next 30 years. “That predicted growth path, combined with a long period of under-investment in infrastructure across New Zealand, means that we now have a big infrastructure programme in place and we need to fund it,” says Mr Butcher.
The programme is nothing if not ambitious. Between 2012 and 2022, the region expects to increase its assets from NZ$35.8bn ($32.6bn) to NZ$58.3bn while liabilities will grow from NZ$7bn to NZ$15.8bn. The scheme will make Auckland the largest borrower in New Zealand after the central government and its banks, but it prompted one obvious question – how should the liabilities be funded?
“Historically, councils in New Zealand were not allowed to borrow offshore but the government realised that we needed to diversify our funding sources so it changed the Local Government Act in late 2011 so that we could borrow in foreign currency on a fully hedged basis,” says Mr Butcher.
Home from home
In 2011, Auckland Council established a European medium-term note (MTN) programme and began looking closely at offshore markets, including sterling, Canadian dollars and Swiss francs. “Our borrowing programme will involve about NZ$1bn to NZ$1.5bn a year, which is not large enough to do benchmark Eurobond issues. But we needed to find a market where we could issue several smallish deals, as we will be a frequent borrower and want to be able to come back on a regular basis,” says Mr Butcher.
“We concluded that Switzerland was best suited to our needs. We could easily do SFr100m ($108.47m) to SFr300m per issue and we could borrow on a 10- to 15-year term, which is what we wanted. The Swiss also appreciate diversity and we have a high AA credit rating. The Swiss cantons are similar to New Zealand councils and the cantons are frequent borrowers so Swiss local investors understand our needs” he adds.
Auckland Council has a long-standing relationship with ANZ Bank, which introduced it to BNP Paribas, the bank that ultimately took the role of sole bookrunner on the Swiss deal.
“BNP was very highly rated in the league tables, it had a strong relationship with ANZ, who complete a significant amount of our debt raising, and it had a Sydney office, which helped a lot. We were very pleased with its professionalism, execution ability and knowledge of the Swiss investor market. It delivered on its promises and was utterly consistent in terms of price expectations,” says Mr Butcher.
Price was, naturally, very important to Auckland. The council is on an efficiency drive so, while it was keen to keep investors sweet, it did not want to overpay. Timing was particularly tricky because Swiss franc/New Zealand dollar swap rates tend to be expensive and highly volatile.
On the road
By December 2012, however, preparations had been made and Auckland embarked on a two-day roadshow, visiting institutions in Zurich and Geneva. “We met with private banks, wealth managers and insurers. We felt it was important to get in front of all investor groups and explain how the council works and why we offer such strong security,” says Mr Butcher.
“First, lenders receive as security a charge over our tax income. Second, we do not have unfunded pension liabilities, so unlike many municipalities we are borrowing for the future. Third, under legislation we have to be fiscally prudent and cannot run an operating deficit, so we do not borrow to fund a short-term problem. Therefore we borrow to fund our long-term infrastructure investment and renewal programme,” he adds.
Swiss investors responded to this prudence with enthusiasm, and in early January BNP Paribas and Auckland concluded that conditions were conducive to issuance. The market environment was positive and swap rates were attractive.
“We knew we had to start somewhere in terms of opening up new markets but we wanted to be cautious and did not have a large funding requirement for the remainder of our June 2013 fiscal year so we decided to issue a maximum of SFr100m,” says Mr Butcher.
Back for more
BNP sounded out the market on Monday, January 7 for an 11-year deal, priced at seven basis points over mid-swaps. Investors responded eagerly and the spread was reduced to five basis points, giving a coupon of just 1.125%. The order book was closed within an hour.
“The pricing met our expectations but investors also received a yield pick-up so it was a good issue for both us and the investors. We did not want to squeeze the market too hard and I think we got the balance just right,” says Mr Butcher.
Having enjoyed such a positive first experience, Auckland intends to return quite soon. “We will probably return in the third quarter of this calendar year but it may even be sooner if pricing improves and investors are keen,” says Mr Butcher.
