16 Oct 2014

NAB leads on revolutionary local government finance

A revolutionary local government financing model being delivered by NAB could generate up to $100 million in savings for Victorian councils over the coming years, freeing up more funds for vital social services and community infrastructure.

Led by the Municipal Association of Victoria (MAV), initially 30 of Victoria’s 79 councils have subscribed to the new funding concept, which will create Australia’s first bond issue backed by local government loans. The debt issue will seek to raise a minimum of $200 million.

NAB Executive General Manager for Debt Markets, Steve Lambert, said financial sector regulations meant it was increasingly expensive for councils to borrow, which is why the MAV approached NAB for a solution.

“What we are doing in Victoria is frankly a revolution in municipal finance,” Mr Lambert said.

“Until now local government lending was the preserve of the big banks, but domestic fund managers will soon be able to invest in council debt issued through a financial innovation known as the Local Government Funding Vehicle (LGFV).”

The landmark new borrowing model will create efficiencies and reduce the borrowing costs of local councils, as it has in jurisdictions overseas.

“It’s a relatively simple concept. The LGFV is a trust that makes loans to councils while issuing bonds for investors that finance them,” Mr Lambert said.

The bonds are provided on equivalent terms to the loans – such as having the same maturity dates – and while the loans are not rated, the bonds carry a credit rating of Aa2 from Moody’s investor services. The rating is the same as Australia’s major banks, which means Victoria’s councils can borrow efficiently directly from the capital markets.

“The money saved then creates an opportunity to reduce council rates and/or free up cash flow to reallocate to community services and infrastructure,” Mr Lambert said.

Each year Victorian councils provide a raft of vital services from providing hundreds of thousands maternal and child health consultations and school immunisations, to delivering millions of meals a year to home care recipients, servicing around 85 per cent of Victoria’s total road network, to collecting more than 600,000 tonnes of recyclable material.

NAB is and remains a leading lender to local government. NAB also recently arranged a bond issue for major Australian universities as it continues a concerted campaign to boost the local corporate bond market.

 

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