DOMESTIC INVESTOR UPDATE 1 26-27 September 2017 IMPORTANT NOTICE - - PowerPoint PPT Presentation

DOMESTIC INVESTOR UPDATE

26-27 September 2017 1

IMPORTANT NOTICE

2

• This presentation has been prepared by New Zealand Local Government Funding Agency Limited (“LGFA”) for general information purposes only.

By listening to the presentation, or reading the presentation materials, you acknowledge and agree to the contents of this disclaimer.

• To the maximum extent permitted by law, neither LGFA nor any of its affiliates, directors, officers, partners, employees or agents make any

representation, recommendation or warranty, express or implied as to the accuracy, completeness or currency of any of the information in this presentation and accept no responsibility or liability therefore. Data are indicative and approximate only, and all information is subject to change. Some information may be taken from publicly available sources and has not been verified by LGFA. This presentation is intended as a snapshot view of LGFA only, and LGFA has no obligation, and does not undertake or accept any responsibility or obligation, to update, expand or correct anything in this presentation or inform you of any matter arising or coming to its notice, after the date of this presentation, which may affect any matter referred to in this presentation.

• This presentation contains forward-looking statements including information regarding LGFA’s future bond issuances and forecast financial

performance based on current information, estimates and forecasts. Those statements are subject to risks, uncertainties, and assumptions which are hard to predict or anticipate, and therefore actual outcomes and performance may differ materially from the statements. Any opinions expressed in this presentation reflect the judgement of LGFA as the date hereof, and do not bind LGFA.

• This presentation is not a product disclosure statement, limited disclosure document or other offer document under New Zealand law or any other
• law. This presentation is not, and does not constitute financial advice. All reasonable care has been taken in relation to the preparation and

collation of this presentation. Except for statutory liability which may not be excluded, no person, including LGFA or any person mentioned in this presentation accepts responsibility for any loss or damage howsoever occurring resulting from the use or reliance on this presentation by any

• person. Past performance is not indicative of future performance and no guarantee or future rights are implied or given.
• Nothing in this presentation is an offer to sell, or solicitation of an offer to purchase, any securities. This presentation must not be relied upon by

any person for making any investment decision and will not form part of any investment contract. The information provided in this presentation is not financial or investment advice and does not take into account the investment objectives, financial situation or particular needs (including financial and taxation issues) of any particular investor. Any person considering in investing in LGFA securities must refer to any relevant offer documents and disclosures provided expressly in connection with those securities and should take their own independent financial and legal advice on their proposed investment. LGFA securities have not been and will not be registered under the United States Securities Act of 1933 (U.S Securities Act) or the securities laws of any state or other jurisdiction of the United States. LGFA securities may not be offered or sold, directly or indirectly, in the United States or to, or for the account or benefit of, any person in the United States except in transactions exempt from, or not subject to, the registration requirements of the U.S. Securities Act and any other applicable U.S. state securities laws.

• This presentation is proprietary to LGFA and may not be copied, distributed, disclosed or used without LGFA's express written consent.
• NZX Limited accepts no responsibility for any statement in this investor presentation. NZX Limited is a licensed market operator and the NZX Debt

Market is a licensed market under the Financial Markets Conduct Act 2013.

DEVELOPMENTS : SEPTEMBER 2016 TO SEPTEMBER 2017

3

➢ Bond lending facility established October 2016 ➢ Fitch reaffirm LGFA ratings at AA+ November 2016 ➢ Private placements of LGFA Bills available January 2017 ➢ April 2033 bond issued April 2017 ➢ NZ$8.0 billion of loans outstanding to fifty-two councils as at 31 August 2017 ➢ S&P reaffirm LGFA credit rating at AA+ September 2017 ➢ Loan book quality improved – no rating downgrades + five councils received rating or outlook upgrade ➢ Council participation – three new councils join taking total participation to fifty-three councils ➢ Non-Guarantors – Central Hawke’s Bay District Council, Northland Regional Council ➢ Guarantors – Waitomo District Council ➢ Horizons Regional Council moved from non-guarantor to guarantor ➢ Bespoke lending increasingly popular – 49% of long term lending in 2016-17 financial year ➢ Support from councils boosts LGFA market share to 83% and 91% (excluding Auckland Council) for year to June 2017 ➢ December 2017 refinancing of loans by councils largely completed ➢ Considering establishing an Australian Notes Programme

LGFA SPREADS TO NZGB AND SWAP (bps)

4 Source: LGFA Secondary market levels as at end of each month (except September 2017 as at 21 September)

Average of all LGFA Bonds outstanding

RELATIONSHIP LGFA SPREADS TO SWAP vs. SWAP SPREADS (bps)

5 Secondary market levels as at end of each month (except September 2017 as at 21 September)

Average of all LGFA Bonds outstanding

Source: LGFA

LGFA SPREADS TO NZGB (bps)

6 Source: LGFA

Secondary market levels as at end of each month (except September 2017 as at 21 September)

LGFA SPREADS TO SWAP (bps)

7 Source: LGFA

Secondary market levels as at end of each month (except September 2017 as at 21 September)

LGFA BOND ISSUANCE

8

LGFA Bonds Issued by Financial Year (NZ$ millions)

Source: LGFA

Maturity 2011-12 (5 months) 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18

year to date

15-Apr-15 155 10 75 15-Dec-17 605 245 110 55 15-Mar-19 75 900 95 40 70 20 15-Apr-20 365 200 190 80 15-May-21 445 625 100 150 30 30 15-Apr-23 355 655 275 65 39 15-Apr-25 100 560 40 15-Apr-27 285 470 205 36 14-Apr-33 215 30

Total Volume

(NZ$ million)

835 1600 1260 1500 1265 1285 255 Average Bond Tender Size

(NZ$ million)

209 182 153 188 141 143 128 Average Issuance Term

(years)

5.34 years 6.57 years 7.04 years 7.92 years 8.10 years 8.28 years 6.59 years

$258m avg. $447m avg. $353m avg. $333m avg. Note: 2017-18 year to date as at 31 August 2017

NZD ISSUES BY TRANCHE SIZE

Source: Bloomberg and LGFA

Note: Outstandings as at 31 August 2017 Excludes New Zealand Government Bonds Include issuers rated “AA” or better Issue size above NZ$500 million only LGFA 28% of this group with seven maturities IBRD 26% of this group with six maturities

9

Issuer Maturity Amount Outstanding (NZ$) World Bank (IBRD) 22/01/2021 $2,025,000,000 LGFA 15/04/2023 $1,439,000,000 LGFA 15/05/2021 $1,430,000,000 IBRD 10/02/2020 $1,400,000,000 IBRD 26/02/2019 $1,350,000,000 LGFA 15/03/2019 $1,250,000,000 International Finance Corp (IFC) 20/05/2020 $1,125,000,000 KFW Bankengruppe 29/05/2020 $1,100,000,000 IBRD 6/10/2021 $1,050,000,000 LGFA 15/04/2027 $1,046,000,000 LGFA 15/12/2017 $1,015,000,000 Rentenbank 23/04/2024 $1,000,000,000 Asian Development Bank 6/03/2019 $950,000,000 LGFA 15/04/2020 $885,000,000 IFC 26/02/2018 $875,000,000 Queensland Treasury Corporation 18/09/2017 $875,000,000 IBRD 20/02/2018 $850,000,000 Nordic Investment Bank (NIB) 30/01/2018 $850,000,000 NIB 22/01/2019 $800,000,000 Rentenbank 12/03/2019 $800,000,000 LGFA 15/04/2025 $750,000,000 Asian Development Bank 30/05/2024 $700,000,000 Inter-American Development Bank 15/12/2017 $660,000,000 NIB 19/03/2020 $650,000,000 Rentenbank 30/01/2020 $600,000,000 Export Development Canada 20/02/2018 $600,000,000 IBRD 25/01/2022 $550,000,000 Kommunalbanken (KBN) 28/03/2019 $550,000,000 KBN 11/12/2017 $500,000,000 $27,675,000,000

PRIMARY AND SECONDARY MARKET ACTIVITY

10 Source: LGFA

Note: Buy side only, does not capture intra day activity or tender activity. Activity in Dec 17 LGFA Bonds excluded from June 2017 turnover data

• nwards. September 2017 month and quarter is up to and including 22 September 2017

LGFA INVESTORS

11 Source: Merlin Consulting, LGFA

LGFA INVESTOR HOLDINGS OVER TIME

12 Source: LGFA

OFFSHORE INVESTOR MONTHLY CHANGES

13 Source: LGFA

LGFA BILL ISSUANCE

14

 Commenced Issuance in October 2015  Monthly tenders via YieldBroker  NZ$25 million 3 month Bills  NZ$25 million 6 month Bills  NZ$125 million of reverse enquiry private placements into bespoke maturities  NZ$350 million outstanding across 1 month to 9 month maturities as at 28 August 2017  Issuance yields of current LGFA Bills outstanding 1.96% to 2.30%  Rated A-1+ by S&P  LGFA Bills constitute unsecured debt obligations of LGFA  Any proceeds from LGFA Bill issuance and not on- lent to councils invested as per Treasury Policy in Liquid Asset Portfolio

Source: LGFA

DECEMBER 2017 LGFA BOND MATURITY UPDATE

15

December 2017 Council Loans

 NZ$992 million originally lent to thirty-five councils  NZ$584 million refinanced as at 31 August 2017 (59%)  NZ$245 million assumed will not be refinanced (25%)  NZ$163 million to be refinanced by approx. fifteen councils (16%)

December 2017 LGFA Bond holders as at 31 August 2017

 NZ$1,015 million bonds outstanding in 140 holdings (including custodians)  NZ$289 million held by domestic banks (28%)  NZ$294 million held by offshore investors (30%)  NZ$384 million held by domestic institutions (37%)  NZ$48 million held by domestic retail investors (5%)

Council Original Borrowing in this maturity (NZ$ million) 1 Auckland Council $325 2 Christchurch City Council $143 3 Hamilton City Council $65 4 Tauranga City Council $60 5 Kapiti District Council $60 6 Greater Wellington Regional Council $50 7 Taupo District Council $25 8 Wellington City Council $25 9 Waikato District Council $20 10 Selwyn District Council $20 11 Whangarei District Council $20 12 Western Bay of Plenty District Council $20 13 New Plymouth District Council $16 14 Tasman District Council $16 15 South Taranaki District Council $15 16 Thames-Coromandel District Council $12 17 Palmerston North City Council $12 18 Rotorua District Council $10 19 Masterton District Council $10 20 Queenstown Lakes District Council $10 21 Whakatane District Council $8 22 Waipa District Council $7 23 Manawatu District Council $5 24 Whanganui District Council $5 25 Timaru District Council $5 26 Matamata-Piako District Council $5 27 Upper Hutt City Council $4 28 Kaipara District Council $3 29 Otorohanga District Council $3 30 Hauraki District Council $3 31 Gisborne District Council $2 32 Horowhenua District Council $2 33 Opotiki District Council $2 34 Tararua District Council $2 35 Hurunui District Council $2 $992

Source: LGFA

BESPOKE LENDING TO COUNCILS

16

 Introduced March 2015  150 trades transacted by 31 August 2017 with 41 councils  NZ$1.411 billion of transactions completed  Approx. 32% of lending since March 2015 and 49% of lending in June 2016-17 year  Limit of 30% of balance sheet for bespoke lending  VaR and PDH limits cover interest rate risk  Assists with managing liquidity

By Amount (NZ$ millions) LGFA Maturity Bespoke Maturity Total LGFA Tender n/a $1,118.9 $1118.9 Non LGFA tender $104.0 $188.3 $292.3 Total $104.0 $1,307.2 $1,411.2 By # Trades LGFA Maturity Bespoke Maturity Total LGFA Tender n/a 116 116 Non LGFA tender 11 23 34 Total 11 139 150

Source: LGFA As at 31 August 2017 As at 31 August 2017

MISMATCHES FROM BESPOKE LENDING

17 Source: LGFA

MINIMAL MISMATCH BETWEEN LGFA BONDS AND LOANS

18 Source: LGFA

RISK MANAGEMENT

19 Source: LGFA

2016-17 FINANCIALS

20

 Net Operating Profit NZ$11.05 million compared to budget NZ$10 million and up 15.7% yoy.  Net Interest Income NZ$17.51 million compared to budget NZ$16.58 million and up 12.8% yoy.  Total Expenses NZ$6.47 million compared to budget NZ$6.58 million and up 8.1% yoy.  Bond Issuance NZ$1.285 billion compared to budget NZ$1.2 billion.

 Net Operating Profit favourable to Statement of Intent (2016-17)

 Loan book higher than forecast (councils have borrowed early to refinance their December 2017 loans and placed proceeds

• n term deposit)

 Higher than forecast loan book resulted in net interest income being NZ$0.93 million higher than budgeted

 Expenses have been managed under budget for the year

 All expense items generally in line with budget  Introduction of the LGFA bond lending facility (and related issuance of NZ$350 million treasury stock) did add some costs but helped improve secondary market liquidity of LGFA bonds

 Budget figures taken from Statement of Intent (2016-17)

 Annual report (2016-17) available at http://www.lgfa.co.nz/files/documents/LGFA_AnnualReport_2017_F_Web.pdf

Source: LGFA 2016-17 Annual Report

LGFA PARTICPATION AND MARKET SHARE

21 Source: PwC and LGFA

As at 30 June 2017

LGFA COUNCIL BORROWINGS (NZ$)

22 Source: LGFA

LENDING TO PARTICIPATING COUNCILS BY EXTERNAL CREDIT RATING

23

As at 31 August 2017

Note: One participating council has yet to borrow from LGFA Includes long and short term lending

External Credit Rating (S&P, Fitch) Lending (NZ$ million) Lending (%) Number of Councils AA $3,872.7 48.1% 12 AA- $890.0 11.1% 7 A+ $2,302.3 28.6% 4 Unrated $983.8 12.2% 29 Total $8,048.8 100% 52

Source: LGFA

S&P RATING CHANGES OVER THE PAST FOUR YEARS

Council Action Date

Western Bay of Plenty District Council Outlook Revised from Stable to Positive Oct 14, 2013 Nelson City Council Outlook Revised from Stable to Positive Dec 13, 2013 Taupo District Council Outlook Revised from Stable to Positive May 30, 2014 Western Bay of Plenty District Council Upgraded from A+ to AA- Oct 14, 2014 Whangarei District Council Outlook Revised from Stable to Positive May 19, 2015 Taupo District Council Upgraded from AA- to AA May 25, 2015 South Taranaki District Council Outlook Revised from Stable to Positive May 29, 2015 Christchurch City Council Outlook Revised from Negative to Stable Dec 7, 2015 Nelson City Council Upgraded from AA- to AA Nov 23, 2015 Whangarei District Council Upgraded from AA- to AA May 19, 2016 Western Bay of Plenty District Council Outlook Revised from Stable to Positive Sep 26, 2016 Tasman District Council Outlook Revised from Stable to Positive Oct 27, 2016 Invercargill Council (non LGFA member) Outlook Revised from Stable to Negative Dec 02, 2016 South Taranaki District Council Upgraded from A+ to AA- May 19, 2017 Whanganui District Council Outlook revised from Stable to Positive June 28 2017 Western Bay of Plenty District Council Upgraded from AA- to AA Sep 22, 2017

24 Source: S&P, Moodys, Fitch As at 22 September 2017

LGFA INTERNAL CREDIT RATINGS (as at 30 June 2016)

Primary Criteria

➢ Debt levels relative to population – affordability ➢ Debt levels relative to asset base ➢ Ability to repay debt ➢ Ability to service debt – interest cover ➢ Population trend

Secondary Criteria

➢ 30 Year Infrastructure Strategy

• Quality of Assets
• Capital Expenditure Plan

➢ Risk Management

• Insurance

➢ Governance ➢ Financial flexibility ➢ Cashflow ➢ Budget performance (balanced budget) ➢ Affordability of rates / Deprivation Index ➢ Natural hazards ➢ Group activities (CCO’s) LGFA Internal Ratings 2012 2013 2014 2015 2016 AA+ 1 2 2 4 4 AA 12 12 12 10 12 AA- 13 13 16 15 19 A+ 8 6 3 11 10 A 6 10 11 6 6 A- 5 2 1 1 LGFA undertakes own internal credit assessment and rating process for all council borrowers using most recent annual reports (June 2016)

25 Source: LGFA

LGFA participating councils by internal rating category

LGFA FINANCIAL COVENANTS – PARTCIPATING COUNCILS OUTCOMES FOR JUNE 2016 YEAR

26

LGFA Financial Covenants – participating councils as at 30 June 2016 with an external credit rating (22)

Foundation Policy Covenant Net Debt / Total Revenue <250% Net Interest / Total Revenue <20% Net Interest / Rates <30% Range of councils compliance

• 158.7% to 214.4%

0.6% to 11.9% 1.2% to 15.5%

LGFA Financial Covenants – participating councils as at 30 June 2016 without an external credit rating (28)

Lending Policy Covenant Net Debt / Total Revenue <175% Net Interest / Total Revenue <20% Net Interest / Rates <25% Range of councils compliance

• 206.2% to 111.0%
• 10.8% to 7.0%
• 28.6% to 11.8%
• Note some negative
• utcomes due to some

councils having negative Net Debt i.e. financial assets and investments > borrowings

• LGFA councils operating

within financial covenants

• Ranges highlight the

differences between councils

• Sufficient financial headroom

for most councils

• Improvement from 2015 for

most councils

• Revenue increased
• Interest rates lower
• Capex and debt

restrained

Source: LGFA using data from individual council annual reports – Note there were 50 participating councils as at 30 June 2016

PERFORMANCE UNDER LGFA COVENANTS

27

LGFA Participating Unrated Councils (28 as at June 2016, 25 in 2015, 26 in 2014 and 21 in 2013)

Financial Covenant June 2016 June 2015 June 2014 June 2013 Net Debt to Revenue <250% 87.9% 96.4% 104.7% 111.8% Net Interest to Revenue <20% 6.1% 6.8% 6.6% 7.3% Net Interest to Rates <30% 9.1% 10.0% 9.6% 11.1%

LGFA Participating Councils with an external credit rating (22 at June 2016, 20 in 2015 and 17 in both 2014 and 2013)

Financial Covenant June 2016 June 2015 June 2014 June 2013 Net Debt to Revenue <175% 32.4% 38.2% 42.6% 52.5% Net Interest to Revenue <20% 2.2% 2.4% 2.9% 3.2% Net Interest to Rates <25% 2.9% 3.1% 4.0% 4.1%

Source: LGFA using data from individual council annual reports

HOUSING INFRASTRUCTURE FUND (HIF)

➢ NZ$1 billion from Government available to assist high growth councils to advance infrastructure projects important to increase housing supply ➢ The HIF will be funded through two mechanisms:

➢ Funding for water infrastructure projects will be in the form of interest free subordinated debt from the Government for a period of up to ten years ➢ Funding for transport infrastructure will be through front loading of councils Funding Assistance Rate subsidy via the National Land Transport Fund

➢ There were seventeen indicative applications amounting to NZ$1.79 billion from seven out of the ten eligible councils ➢ NZ$889 million of funding awarded to five councils in July 2017 ➢ The final applications are non-binding on councils. Any successful bids are likely to form part of council’s 2018-2028 long term plan process ➢ Detailed business cases being currently worked on June to Dec 2017 ➢ LGFA will closely monitor draft 2018-2028 long term plans, alternative funding structures and available headroom under the financial covenants (ability to cope with shocks)

28 Source: LGFA, Ministry of Business, Innovation and Employment Auckland NZ$300 million Waikato District NZ$37 million Hamilton City NZ$272 million Tauranga City NZ$230 million Queenstown Lakes District NZ$50 million Contingency allowance NZ$111 million HIF Allocation

CROWN INFRASTRUCTURE PARTNERS

➢ Formerly Crown Fibre Holdings

➢ Set up to manage the building of the ultra-fast broadband network

➢ The Government will co-invest NZ$600 million alongside councils and private investors ➢ Will set up companies (SPVs) to build and own new infrastructure for housing developments ➢ Long term revenue streams will come from a combination of targeted rates and volumetric charging for the use of the infrastructure assets by new residents ➢ Councils will have the option of buying back the infrastructure at some future point ➢ Two early projects have been identified

➢ Wainui (north of Auckland) 5,500 additional homes ➢ Pukekohe, Paerata and Drury (south of Auckland) 17,800 additional homes

➢ Not just a tool for Auckland – intended to be used in other fast growing areas across New Zealand

29 Source: LGFA and National Party www.national.org.nz/crown_company_to_invest_600m_in_housing_infrastructure

HISTORIC FINANCIAL PERFORMANCE

30

Note: As at 30 June each year or for the twelve month period ending 30 June each year. Source: LGFA Annual Reports Financials (NZ$ millions) 2012 2013 2014 2015 2016 2017 Interest Income $10.9 $73.7 $149.1 $222.8 $278.2 $320.7 Interest Expense $9.9 $68.1 $138.9 $208.9 $262.6 $303.2 Net Interest Income $1.0 $5.7 $10.2 $13.9 $15.5 $17.5 Total Income $1.0 $5.7 $10.2 $13.9 $15.5 $17.5 Operating Expenses ($5.2) ($3.0) ($3.2) ($4.7) ($6.0) ($6.5) Net Profit ($4.2) $2.6 $7.0 $9.2 $9.5 $11.0 Liquid Assets Portfolio $52.8 $66.3 $101.7 $107.9 $266.3 $327.5 Loans to Local Government $832.7 $2,514.9 $3,742.5 $5,031.9 $6,451.3 $7,783.9 Other Assets $57.5 $107.0 $74.0 $271.9 $539.7 $380.0 Total Assets $943.0 $2,688.2 $3,918.2 $5,411.8 $7,257.3 $8,491.4 Bonds on Issue $908.9 $2,623.6 $3,825.3 $5,247.3 $6,819.7 $7,865.4 Bills on Issue $ nil $ nil $ nil $ nil $223.9 $348.2 Borrower Notes $13.2 $40.7 $61.9 $85.1 $108.4 $131.6 Other Liabilities $0.2 $0.6 $2.1 $16.1 $61.0 $92.3 Total Liabilities $922.3 $2,664.8 $3,889.3 $5,375.6 $7,213.0 $8,437.5 Shareholder Equity $20.8 $23.4 $28.8 $36.3 $44.2 $53.9

HISTORIC FINANCIAL RATIOS

31 Note: As at 30 June each year or for the twelve month period ending 30 June each year. Source: LGFA Annual Reports

Ratios as at 30 June each year 2012 2013 2014 2015 2016 2017 Liquid Assets / Funding Liabilities 5.7% 2.5% 2.6% 2.0% 3.8% 4.1% Liquid Assets / Total Assets 5.6% 2.5% 2.6% 2.0% 3.7% 3.9% Net Interest Margin 0.12% 0.23% 0.27% 0.28% 0.24% 0.23% Cost to Income Ratio 531.2% 53.6% 31.8% 33.7% 38.5% 36.9% Return on Average Assets

• 0.45%

0.10% 0.18% 0.17% 0.13% 0.13% Shareholder Equity / Total Assets 2.2% 0.9% 0.7% 0.7% 0.6% 0.6% Shareholder Equity + Borrower Notes / Total Assets 3.6% 2.4% 2.3% 2.2% 2.1% 2.2% Asset Growth n/a 185.1% 45.8% 38.1% 34.1% 17.0% Loan Growth n/a 202% 48.8% 34.5% 28.2% 20.7% Return on Equity n/a 12.7% 29.8% 31.9% 26.3% 25.0% Capital Ratio 18.0% 11.9% 11.6% 11.2% 10.5% 10.9%

31

HISTORIC AND FORECAST FINANCIAL PERFORMANCE

32 Forecast performance based upon assumptions outlined in LGFA Statement of Intent 2016-17. The principal assumption is NZ$1.25 billion of gross issuance per year in each of 2017-18, 2018-19 and NZ$1.1 billion in 2019-20 financial years. Source: LGFA

SUMMARY

33

 LGFA in operation since late 2011  Primary objective is to optimise debt funding terms and conditions for New Zealand Local Government sector  Same credit rating as the New Zealand Sovereign at AA+  31 shareholders, including the New Zealand Government at 20%  Strong liquidity position supported by New Zealand Government liquidity facility of up to NZ$1 billion (currently set by LGFA at NZ$800 million as at 31 August 2017).  Underlying credit quality is the New Zealand Local Government sector  LGFA's obligations are guaranteed by 45 local authorities  Largest domestic issuer of NZD domestic bonds (excluding NZ Government) with current outstandings of NZ$8.11 billion across eight tranches as at 31 August 2017  Regular issuance via tender  29 to 111 basis point pick up in yield over comparable NZGB maturities

Rating Agency Domestic Currency Foreign Currency Date of Report AA+ (stable outlook) AA (stable outlook) 25 September 2017 AA+ (stable outlook) AA (stable outlook) 14 November 2016

Appendix and Contacts

LGFA PARTCIPATION

35

SHAREHOLDERS

 LGFA was incorporated on 1 December 2011 with 18 foundation council shareholders and the New Zealand Government.  On 30 November 2012 a further 12 new council shareholders joined bringing the total number of council shareholders to 30. (In addition to the New Zealand Government).

BORROWERS

 As of 31 August 2017 there are 53 councils who eligible borrowers.  As at 31 August 2017, 52 councils had borrowed from LGFA with Bay

• f Plenty Regional Council the only

non-Borrower.  As at 31 August 2017 , the 53 councils comprised around 97% of total council debt.

GUARANTORS

 There are 45 Guarantors of LGFA.  Guarantors comprise:

➢ All shareholders except the NZ Government ➢ Any non shareholder who may borrow more than NZ$20 million

 The only borrowers who are non- Guarantors are:

➢ Buller District Council ➢ Central Hawke’s Bay District Council ➢ Gore District Council ➢ Grey District Council ➢ Northland Regional Council ➢ Opotiki District Council ➢ South Wairarapa District Council ➢ Tararua District Council

 The security granted by each of the Guarantors under their respective Debenture Trust Deeds secures their

• bligations under the Guarantee.

There are 78 local authorities in New Zealand comprising:

➢ 11 Regional Councils ➢ 12 City Councils (including 1 unitary) ➢ 54 District Councils (including 3 unitary) ➢ 1 Unitary Territorial Authority Source: LGFA

LGFA PARTICIPATION

36

LGFA participating councils highlighted with year of joining Participating councils by number

Source: LGFA

LGFA PARTICIPATING COUNCILS (As at 31 August 2017)

37

Shareholders Total Shares Shareholding (%) Amount borrowed (NZ$ million) Borrowing (%) Share of Guarantee (%)

New Zealand Government 5,000,000 11.1% Auckland Council 3,731,960 8.3% 2,407.0 29.9 33.5 Christchurch City Council 3,731,960 8.3% 1,645.2 20.4 8.5 Hamilton City Council 3,731,960 8.3% 350.0 4.3 2.9 Bay of Plenty Regional Council 3,731,958 8.3%

• 0.0

0.7 Wellington Regional Council 3,731,958 8.3% 305.0 3.8 2.9 Tasman District Council 3,731,958 8.3% 110.2 1.4 1.5 Tauranga City Council 3,731,958 8.3% 355.0 4.4 2.9 Wellington City Council 3,731,958 8.3% 308.0 3.8 5.8 Western Bay of Plenty District Council 3,731,958 8.3% 110.0 1.4 1.3 Whangarei District Council 1,492,784 3.3% 152.0 1.9 1.8 Hastings District Council 746,392 1.7% 60.0 0.7 1.5 Marlborough District Council 400,000 0.9% 82.0 1.0 1.3 Selwyn District Council 373,196 0.8% 35.0 0.4 0.9 Gisborne District Council 200,000 0.4% 27.0 0.3 1.1 Hauraki District Council 200,000 0.4% 41.0 0.5 0.6 Horowhenua District Council 200,000 0.4% 77.1 1.0 0.7 Hutt City Council 200,000 0.4% 112.0 1.4 2.1 Kapiti Coast District Council 200,000 0.4% 225.0 2.8 1.2 Manawatu District Council 200,000 0.4% 58.0 0.7 0.6 Masterton District Council 200,000 0.4% 54.0 0.7 0.6 New Plymouth District Council 200,000 0.4% 86.0 1.1 1.7 Otorohanga District Council 200,000 0.4% 9.0 0.1 0.3 Palmerston North City Council 200,000 0.4% 87.1 1.1 1.8 South Taranaki District Council 200,000 0.4% 62.0 0.8 0.8 Taupo District Council 200,000 0.4% 125.0 1.6 1.3 Thames-Coromandel District Council 200,000 0.4% 35.0 0.4 1.3 Waimakariri District Council 200,000 0.4% 115.1 1.4 1.1 Waipa District Council 200,000 0.4% 48.0 0.6 1.1 Whanganui District Council 200,000 0.4% 66.0 0.8 1.2 Whakatane District Council 200,000 0.4% 46.1 0.6 0.9 Total

45,000,000 7192.8 89.4 83.9

Note: Total shares includes called and uncalled shares

Source: LGFA

LGFA PARTICIPATING COUNCILS CONTINUED

(As at 31 August 2017)

38

Borrowers and Guarantors Amount borrowed (NZ$ million) Borrowing (%) Share of Guarantee (%)

Ashburton District Council 35.1 0.4 0.7 Canterbury Regional Council 25.0 0.3 2.0 Far North District Council 30.0 0.4 1.7 Hurunui District Council 25.0 0.3 0.3 Horizons Regional Council 15.0 0.2 0.4 Kaipara District Council 52.0 0.6 0.7 Matamata-Piako District Council 29.5 0.4 0.7 Nelson City Council 55.0 0.7 1.4 Porirua City Council 38.5 0.5 1.2 Queenstown-Lakes District Council 95.1 1.2 1.3 Rotorua District Council 114.7 1.4 1.7 Timaru District Council 77.1 1.0 1.0 Upper Hutt City Council 38.5 0.5 0.7 Waikato District Council 95.0 1.2 1.5 Waitomo District Council 30.0 0.4 0.4

Total 760.6 9.4 16.1 Borrowers Only

Buller District Council 20.0 0.2 Central Hawke’s Bay District Council 2.0 0.0 Gore District Council 17.0 0.2 Grey District Council 20.0 0.2 Northland Regional Council 2.8 0.0 Opotiki District Council 5.0 0.1 South Wairarapa District Council 17.6 0.2 Tararua District Council 11.0 0.1

Total 95.4 1.2 Total Borrowing from LGFA 8048.8 100.0

Source: LGFA

LGFA PARTCIPATING COUNCILS - AGGREGATED FINANCIAL POSITION

39

The amounts in this slide have been extracted from the Local Authority Financial Statistics database managed by Statistics New Zealand – calculated as at June 2016 and for the June 2015-16 year. The data comprises the fifty-three participating council members of LGFA as at 31 August 2017.

Assets (NZ$ billion)

Current Assets 3.16 Non Current Assets Infrastructure 59.89 Land and Buildings 19.94 Investments 24.59 Other 4.94 109.36 112.52

Liabilities (NZ$ billion)

Debt 12.98 Non-Equity Liabilities 3.72 16.70

Net Worth (NZ$ billion)

95.82

Revenue (NZ$ million)

Taxation revenue Property 4,686 Regulatory income and petrol tax 482 5,168 Sales and other operating income 1,054 Interest and dividend income 483 Current grants and subsidies 411 Total Operating Income 7,116

Expenses (NZ$ million)

Employee expenses 1,660 Depreciation 1,388 Purchases of goods and services 2,729 Interest expense 642 Current grants and subsidies 769 Total Operating Expenses 7,188

Net Operating Balance (NZ$ million)

(72)

GOVERNANCE STRUCTURE

40

 31 Shareholders, comprising the New Zealand Government (20%)1 and thirty councils (80%).  LGFA Shareholders Council, comprising five to ten appointees from the Council Shareholders and the Government. Role

• f the Shareholders' Council is to:

➢ Review and report performance of LGFA and the Board; ➢ Recommendations to Shareholders as to the appointment, removal, replacement and remuneration of directors; ➢ Recommendations to Shareholders as to any changes to policies, or the Statement of Intent, requiring their approval; ➢ Update Shareholders on LGFA matters and to coordinate Shareholders on governance decisions.

1 NZ Government shareholding reduces to 11.1% if a call is made

• n uncalled capital of the 30 council shareholders

 LGFA Board, is responsible for the strategic direction and control of LGFA’s

• activities. The Board guides and

monitors the business and affairs of LGFA, in accordance with:

➢ Local Government Act 2002; ➢ Local Government Borrowing Act 2011; ➢ Companies Act 1993; ➢ Financial Markets Conduct Act 2013 ➢ LGFA’s Constitution; ➢ LGFA Shareholder Agreement; ➢ LGFA annual Statement of Intent.

The Board will comprise between four and seven directors with a majority of independent directors appointed by Shareholders.

Shareholder Council LGFA Board LGFA Central Government (20%) 30 Council Shareholders (80%)

CAPITAL STRUCTURE

Capital Position (NZ$ million)

.

41

Establishment Shares Borrower Notes Subscription Date: At establishment of the LGFA At time of borrowing Subscribers: NZ Government 20% ; Councils 80% Councils in relation to borrowings (excluding loans less than 365 days) Nature: Ordinary share (paid and uncalled) Sub debt convertible (ranks behind other lenders/creditors to LGFA) Control: Voting rights (one vote per paid in share) Non-voting Paid up Amount: NZ$25 million in total 1.6% of Council borrowing (excluding short dated borrowing) Uncalled Amount: 1 paid up : 1 uncalled for Council shareholders - $20 million in total

• Return:

Discretionary dividend payment LGFA cost of funds + 200bps Paid on maturity LGFA cost of funds Term / Exit: Permanent capital Exit must be to other Councils or NZ Government Temporary capital – repaid at maturity of associated Council loan In certain limited circumstances can be converted by LGFA into permanent capital

NZ$ million as at 30 June 2012 as at 30 June 2013 as at 30 June 2014 as at 30 June 2015 as at 30 June 2016 as at 30 June 2017 Paid up share capital: 25.0 25.0 25.0 25.0 25.0 25.0 Retained Earnings:

• 4.2
• 1.6

3.8 9.75 19.2 28.9 Unpaid shares: 20.0 20.0 20.0 20.0 20.0 20.0 Borrower Notes: 13.2 40.7 61.9 85.12 108.4 131.6 Total Equity:1 34.0 63.1 90.7 119.87 152.6 185.5 Equity / Total Assets 3.6% 2.4% 2.3% 2.2% 2.1% 2.2%

Source: LGFA Annual and Half Year Reports

1 Note Equity excludes unpaid shares

GUARANTEE STRUCTURE

 LGFA's obligations in relation to the Securities are guaranteed by the councils that are Guarantors under the Guarantee. ➢ Other than the New Zealand Government, each shareholder in LGFA must be a Guarantor. ➢ In addition any non-shareholder council that borrows in aggregate NZ$20 million or more from LGFA must be a Guarantor.  The Guarantee is in favour of the Security Trustee in relation to the obligations of LGFA.  Any call under the Guarantee will be allocated across all the Guarantors on a pro rata basis in relation to their rates (property tax) revenue.  In addition to the Guarantee, if there is a ‘risk of imminent default’ the LGFA Board can decide to make a call on guarantors equal in value to their potential liability under the Guarantee (in order to reduce the risk of an LGFA default).  Parties to the guarantee able to exit the arrangement but only after: ➢ All of the exiting council’s borrowings are repaid. ➢ All of the LGFA’s borrowings, current at the time the council notifies of its withdrawal from the guarantee, are repaid.

42

GUARANTEE STRUCTURE

 The Guarantee is supported by : ➢ All borrowers (in aggregate of over NZ$20 million) must be a party to the Guarantee. ➢ Each Guarantor must provide as security a charge over rates (property taxes). ➢ LGFA only lends to the Local Government sector - no history of default.  Structural Protections: ➢ Establishment Capital of NZ$25 million and uncalled capital of NZ$20 million. ➢ Borrower Notes = 1.6% of long dated loans to Participating Councils.

43

KBN Norway KommuneKredit Denmark Kommuninvest Sweden Municipality Finance Finland Arrangement No direct explicit sovereign

• guarantee. Joint and several

guarantee provided by members Direct, joint and several guarantee from members (Danish Local Governments). Municipalities and county councils that are members of the Kommuninvest Cooperative Society have signed a joint and several guarantee. No explicit sovereign guarantee. Has explicit guarantee on funding from the Municipal Guarantee Board (MGB), which is owned and guaranteed by most Finnish municipalities. Limitation Local Government borrowers guarantee own obligations only No limit No limit No limit but a pro-rata side agreement Ownership 100% owned by Kingdom of Norway. Membership by 100% Danish Local Governments. 100% owned by Swedish local governments through Kommuninvest Cooperative Society. 53.3% owned by Finnish local governments together with the Association of Finnish Local and Regional Authorities. 30.7%

• wned by the Local

Government Pension Institutea and 16% by the central government of Finland.

COUNCIL FINANCIAL DISTRESS - MITIGANTS

44

• Local Government Framework reduces risk of financial distress – no historical default by a council
• Council have own Treasury Management and borrowing policies – most have independent advice
• Council financial oversight by Office of Auditor General (OAG), Audit NZ and Department of Internal Affairs
• Councils under Local Government (Financial Reporting and Prudence) Regulations 2014 Act required to

report annually on performance against six benchmarks Six step intervention process possible by Central Government

• Council required to comply with LGFA lending covenants

Annual attestation by council LGFA credit analysis and monitoring performed through the year LGFA credit watch-list in place LGFA not required to lend to participating councils

• Covenant breach is an Event of Review – after 30 days LGFA can seek repayment of loans

Request Information Appoint Crown Review Team Appoint Crown Observer Appoint Crown Manager Appoint a Commission Call an Election

Rates Affordability Debt Affordability Essential Services Debt Servicing Debt Control Operations Control

COUNCIL FINANCIAL DISTRESS – LGFA IMPACT

45

• As at 31 August 2017, 23 LGFA participating councils have external credit ratings (A+ to AA range)
• LGFA undertakes detailed credit analysis of each council if they apply to join LGFA (and ongoing) - not every council

has been accepted as a participant

• A council default becomes a timing issue for LGFA

LGFA lends secured against rates revenue under Debenture Trust Deed Unlikely to be other claimants on rates revenue given LGFA is the dominant lender to councils Trustee appoints receiver and a special rate (property tax) levied on all properties in the council region to meet obligations (interest + principal) when due Property taxes unavoidable and first ranking security over property If council in financial difficulty you would expect some degree of central Government intervention

• Sources of LGFA liquidity and additional capital

Up to NZ$1 billion standby facility from NZ Government

Liquid Assets Portfolio Issuance of additional LGFA Bills and Bonds Conversion of Borrower Notes into equity Uncalled capital of NZ$20 million

• LGFA Board can call upon the equity commitment from councils
• Note: central Government does not guarantee obligations of either LGFA or participating councils

PRUDENT APPROACH TO RISK MANAGEMENT

46 LGFA’s policy to minimise financial risks and carefully identify, manage and control all risk.

 Market Risk

➢ PDH limit of NZ$40,000 ➢ VAR limit of NZ$250,000

 Credit Risk

All Councils that borrow from LGFA are obliged to:

➢ Provide security in relation to their borrowing from LGFA and related obligations. ➢ Issue securities (bonds/FRNs/CP) to LGFA. ➢ Comply with their own internal borrowing policies. ➢ Comply with the LGFA financial covenants within either the Lending Policy or Foundation Policy Auckland Council is limited to a maximum of 40% of LGFA’s total Local Authority assets. No more than the greater of NZ$100 million or 33% of a Local Authority’s borrowings from LGFA will mature in any 12 month period.

 Liquidity and Funding Risk

Cash and Investments

➢ LGFA manages liquidity risk by holding cash and a portfolio of liquid assets to meet obligations when they fall due. ➢ Only invest in NZD senior debt securities, money market deposits and registered certificates of deposits within strict counterparty limits.

DMO standby facility

➢ The New Zealand Debt Management Office provides a committed liquidity facility up to NZ$1 billion in size that LGFA can draw upon to meet any exceptional and temporary liquidity shortfall. ➢ Currently the facility size is set by LGFA at NZ$800 million (as at 31 August 2017) Financial covenant Lending policy covenants Foundation policy covenants Net Debt / Total Revenue <175% <250% Net Interest / Total Revenue <20% <20% Net interest / Annual Rates Income <25% <30% Liquidity >110% >110% Liquidity position as at 31 August 2017 NZ$ million Cash and cash equivalents $26.7 Deposits and Marketable Securities $235.3 NZDMO Liquidity Facility $800.0 Total $1,062.0

Source: LGFA

LGFA AND NZGB CURVES

47

Secondary market yields as at 21 September 2017

NZLGFA Curve on Bloomberg: GC I737

Source: Bloomberg, LGFA

LGFA INVESTOR HOLDING CHANGES

48 Source: LGFA

LGFA BOND LENDING FACILITY

49

 Commenced October 2016  LGFA to issue NZ$50 million of each LGFA bond maturity to itself and hold as Treasury Stock  LGFA to make available the LGFA bonds to its bank counterparties to borrow  Any bond lending transacted as a repo  Terms of less than 30 days  Secured against cash  Outstanding loans for each LGFA bond maturity at end of each month will be publicly disclosed via NZX  Intention  to facilitate additional secondary market liquidity in LGFA bonds  not to allow for shorting of LGFA bonds  Timing  NZX Waivers received September 2016  Treasury systems and accounting treatment completed September 2016  Subscribe for Treasury Stock in LGFA bond tenders  October 2016 tender – 2021s, 2023s, 2025s and 2027s issued  November 2016 tender – 2019s and 2020s issued  April 2017 tender – 2033s issued  Sixty two transactions undertaken between October 2016 and August 2017

LGFA CREDIT RATINGS

50

 Fitch Ratings - November 2016 (Note: Refer to the full report for a comprehensive analysis of LGFA)

Local Currency AA+ / Stable/ F1+ Foreign currency rating AA / Stable / F1+ Fitch notes:

➢ strong links to the sovereign – classified as a credit linked Public Sector Entity; ➢ deemed to be of strategic importance; ➢ sound underlying asset quality of its shareholders, local councils; ➢ long-term rating is capped by the ratings of the sovereign; ➢ support of a joint and several liability guarantee.

 Standard and Poor’s Ratings Services – September 2017 (Note: Refer to the full report for a comprehensive analysis of LGFA)

Local Currency AA+ / Stable / A-1+ Strengths:

➢ strong market position as a lender to New Zealand local government; ➢ extremely high likelihood of extraordinary support from the New Zealand Government in a distress scenario ➢ exceptional credit quality of the New Zealand local government sector.

Weaknesses:

➢ reliance upon wholesale funding with some maturity and borrower concentration. Additional S&P research: ➢ New Zealand Councils’ High Governance Standards Ensure Strong Financial Management, Transparency and Long Term Planning – 30 November 2015 ➢ New Zealand’s Reforms Are Strengthening Council’s Financial Management and Long-Term Planning – 24 November 2014; ➢ New Zealand Councils: How the Ratings Capture Qualitative Differences – 9 April 2014; ➢ New Zealand Councils’ Generally Well-Managed Liquidity Positions Support Their Credit Quality – 3 February 2014.

LGFA HISTORY DECEMBER 2011 to JUNE 2016

51

Six months to June 2012

 Incorporated December 2011  Commenced bond issuance in February 2012  2015 and 2017 bonds issued  Nineteen shareholders  NZ$819 million of loans to fourteen councils

July 2012 to June 2013

 Twelve new council shareholders bringing total to thirty-one  KangaNews NZ Domestic Issuer of the Year – 2012  Inaugural dividend of NZ$1.5 million declared – double the

• riginal business case

 2019 bond issued  INFINZ award for Best Bond Issue of 2012  Inaugural LGFA Borrowers Forum  NZ$2.48 billion of loans outstanding to thirty-seven councils

July 2013 to June 2014

 New issues of 2021 and 2023 bonds  NZ$3.7 billion of loans outstanding to forty-three councils

July 2014 to June 2015

 New issues of 2020 and 2027 bonds  Bespoke lending introduced  Successful refinancing of April 2015 bond maturity and on-lending  Capital structure review  Governance review  New Treasury Management System implemented  Transitioned front/middle/back office from NZDMO  NZ$4.97 billion of loans outstanding to forty-four councils

July 2015 to June 2016

 LGFA Bonds listed on NZX in November 2015  Commenced LGFA Bill issuance  Commenced short term lending to councils  Governance change – 2 new directors , one retirement  Five new council participants join taking total to fifty councils  Transitioned to Financial Markets Conduct Act  NZ$6.4 billion of loans outstanding to forty-nine councils

CONTACTS

52

Website: www.lgfa.co.nz

Bloomberg Ticker: NZLGFA Bloomberg : LGFA

Postal Address P.O. Box 5704 Lambton Quay Wellington 6145 Street Address Wellington Level 8 142 Featherston Street Wellington 6011 Street Address Auckland Level 12 1-3 Albert Street Auckland Mark Butcher – Chief Executive Tel: +64 (04) 974 6744 Email: mark.butcher@lgfa.co.nz Andrew Michl – Manager, Credit & Client Tel: +64 (04) 974 6743 Email: andrew.michl@lgfa.co.nz Neil Bain – Chief Financial Officer Tel: +64 (04) 974 6742 Email: neil.bain@lgfa.co.nz Jane Phelan – Operations Manager Tel: +64 (04) 974 6530 Email: lgfa@lgfa.co.nz