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E 3DUWLFLSDWH LQ WKH /*)$ 6FKHPH DV D *XDUDQWHHLQJ /RFDO $XWKRULW\ EXW QRW D 3ULQFLSDO 6KDUHKROGLQJ Local Authority. F 3DUWLFLSDWH LQ WKH /*)$ 6FKHPH EXW QRW DV D 3ULQFLSDO 6KDUHKROGLQJ /RFDO $XWKRULW\ RU DV D *XDUDQWHHLQJ Local Authority. G1RW SDUWLFLSDWH LQ WKH /*)$ 6FKHPH Part C of the Information Memorandum sets out an DQDO\VLV RI WKH FRVWV DQG EHQHWV RI SDUWLFLSDWLQJ LQ WKH /*)$ 6FKHPH 7KDW DQDO\VLV LV VXSSOHPHQWHG E\ VRPH FRQVLGHUDWLRQ RI *UHDWHU :HOOLQJWRQV VSHFLF circumstances below. Should Greater Wellington participate in the LGFA Scheme as a borrower? The projected level of the Greater Wellingtons ERUURZLQJV WKDW FRXOG EH QDQFHG E\ /*)$ DW 30 June 2011 is $38 million based on the 2009-2019 /7&&3 %RUURZLQJV WKDW FRXOG EH QDQFHG E\ /*)$ are projected to grow to $190 million by 2018/19. &RQVHTXHQWO\ WKH EHQHWV RI ORZHU LQWHUHVW PDUJLQV DUH VLJQLFDQW 7KH ERUURZLQJV IRU :5& +ROGLQJV /LPLWHG ZKLFK PD\ EH UHQDQFHG KDYH EHHQ LQFOXGHG ZKHQ existing borrowings mature in 2013/14 as savings will be realised for Greater Wellington through increased dividends. Greater Wellington anticipates that savings will be SHU PLOOLRQ RI ERUURZLQJV QDQFHG with the LGFA instead of through the existing debt market. %DVHG RQ WKLV DVVXPSWLRQ WKH VDYLQJV IRU *UHDWHU Wellington on the projected levels of debt are:
Analysis of Reasonably Practicable Options
The reasonably practicable options are as follows: D 3DUWLFLSDWH LQ WKH /*)$ 6FKHPH DV D 3ULQFLSDO 6KDUHKROGLQJ /RFDO $XWKRULW\
2010/11 ($000s) 2011/12 ($000s) 2012/13 ($000s)
Total projected borrowings in the 20092019 Long Term Council Community Plan (LTCCP) 7RWDO QHZ DQG UHQDQFHG GHEW WKDW FRXOG EH QDQFHG E\ /*)$ 7KLV includes WRC Holdings Limiteds UHQDQFHG GHEW EXW H[FOXGHV ZRUNLQJ capital requirements which will be QDQFHG WKURXJK SULYDWH VHFWRU EDQNV Expected savings from Councils involvement in the LGFA Impact of current interest margins compared to interest margins in the LTCCP Expected savings from Councils involvement in the LGFA compared to interest margins in the LTCCP
The projected savings are based on modelling by &DPHURQ 3DUWQHUV DQG $VLD 3DFLF 5LVN 0DQDJHPHQW Although the modelling is based on a number of DVVXPSWLRQV WKLV QXPEHU JLYHV DQ LQGLFDWLRQ RI WKH VFDOH of potential savings. Greater Wellington believes that the EHQHW RI WKHVH VDYLQJV RXWZHLJK WKH FRVWV UHIHUUHG WR LQ WKH FRVWEHQHW DQDO\VLV LQ 3DUW & RI WKH ,QIRUPDWLRQ Memorandum. &RQVHTXHQWO\ *UHDWHU :HOOLQJWRQ SURSRVHV WKDW RSWLRQ (d) is not adopted. Should Greater Wellington participate in the LGFA Scheme without being a Guaranteeing Local Authority? ,I *UHDWHU :HOOLQJWRQ ZDV WR MRLQ WKH /*)$ 6FKHPH ZLWKRXW EHLQJ D *XDUDQWHHLQJ /RFDO $XWKRULW\ WKH FRVW RI SDUWLFLSDWLQJ ZRXOG EH OHVV +RZHYHU LW ZRXOG IDFH KLJKHU IXQGLQJ FRVWV UHGXFLQJ WKH EHQHW RI SDUWLFLSDWLQJ DQG LW LV OLNHO\ WKDW LW ZRXOG RQO\ EH DEOH WR ERUURZ XS WR PLOOLRQ PHDQLQJ WKH EHQHWV ZRXOG EH limited to a small portion of its borrowing. &RQVHTXHQWO\ *UHDWHU :HOOLQJWRQ LV SURSRVLQJ WR SDUWLFLSDWH DV D *XDUDQWHHLQJ /RFDO $XWKRULW\ DQG therefore proposes that option (c) is not adopted. Should Greater Wellington participate in the LGFA Scheme as a Principal Shareholding Local Authority? 7KH &RXQFLO EHOLHYHV WKDW LQYHVWLQJ LQ WKH /*)$ 6FKHPH DV D 3ULQFLSDO 6KDUHKROGLQJ /RFDO $XWKRULW\ LV MXVWLHG here for the two reasons set out above. That is: (a) As discussed in the Information Memorandum (in 3DUW & D UHWXUQ ZLOO EH SDLG RQ WKH FDSLWDO LQYHVWPHQW PDGH E\ 3ULQFLSDO 6KDUHKROGLQJ /RFDO $XWKRULWLHV (b) If Greater Wellington participates as a Principal 6KDUHKROGLQJ /RFDO $XWKRULW\ WKDW LQFUHDVHV WKH FKDQFH WKDW WKH /*)$ 6FKHPH ZLOO EH YLDEOH DQG WKDW *UHDWHU :HOOLQJWRQ ZLOO EH DEOH WR JDLQ WKH EHQHWV RI participating in it. What is the risk of Greater Wellington participating in the LGFA Scheme as a Principal Shareholding Local Authority as a result of the guarantee? Greater Wellington is intending to provide a guarantee in support of the LGFA and to all participating Local Authorities. Greater Wellington has considered the risks associated with the guarantee and consider it to be low because: 7KH RQO\ ERUURZHUV IURP /*)$ ZLOO EH /RFDO Authorities and there has been no default by a Local $XWKRULW\ LQ 1HZ =HDODQG ,Q WKH HYHQW RI D GHIDXOW the LGFA will immediately be able to appoint a receiver and assess a special rate against all ratepayers in the defaulting Local Authoritys district.
7KH /*)$ ZLOO KDYH FRQVLGHUDEOH VRXUFHV RI FDSLWDO and liquidity available to meet any shortfall in timing of payments before any call is made under the guarantee. 2SHUDWLRQDO ULVN LV PLQLPDO GXH WR WKH FRQVHUYDWLYH borrowing and lending policies proposed as part of WKH /*)$ VFKHPH )XUWKHUPRUH LW LV SURSRVHG WKDW DOO ERUURZLQJ LQYHVWLQJ EDFN RIFH DQG KHGJLQJ functions will be undertaken on behalf of LGFA by WKH 'HEW 0DQDJHPHQW 2IFH RI WKH 1HZ =HDODQG Treasury. Why can we not quantify the guarantee exposure? Greater Wellington cannot quantify the guarantee exposure at this time because it depends upon the size of WKH /*)$ WKH OHQGLQJ SUROH DQG WKH RSHUDWLQJ VWUXFWXUH This information is not available until such time that the LGFA is established and these factors are more certain. At LQFHSWLRQ RI WKH /*)$ *UHDWHU :HOOLQJWRQ ZLOO DVVHVV LWV exposure to the guarantee and review the exposure on an annual basis. This exposure may have to be included in WKH DQQXDO QDQFLDO VWDWHPHQWV &RQVHTXHQWO\ *UHDWHU :HOOLQJWRQ LV SURSRVLQJ WKDW RSWLRQ D EH DGRSWHG 7KDW LV *UHDWHU :HOOLQJWRQ LV SURSRVLQJ WKDW LW SDUWLFLSDWHV LQ WKH /*)$ 6FKHPH DV D 3ULQFLSDO 6KDUHKROGLQJ /RFDO $XWKRULW\ DQG Guaranteeing Local Authority) and amends the Treasury Risk Management Policy accordingly.
Parts of Policies Documents from the 2009-19 Long-Term Council Community Plan to be Amended
Greater Wellington proposes that sections be added to Treasury Risk Management Policy (TRMP) which incorporates Greater Wellingtons Investment Policy and Liability Management Policy. The suggested additions are DWWDFKHG DV $SSHQGL[ DQG IRUP SDUW RI WKLV SURSRVDO Investment activity The investment activity component of the TRMP will be amended to make it clear that Greater Wellingtons investment activity includes participating as a Principal 6KDUHKROGHU LQ /*)$ 7KHUH ZLOO EH D GLUHFW UHWXUQ RQ WKLV LQYHVWPHQW EXW it is acknowledged that this may be less than might be achieved by alternative investments. There is an DGGLWLRQDO EHQHW WR *UHDWHU :HOOLQJWRQ LQ WKDW *UHDWHU Wellingtons investment of capital makes it more likely WKDW WKH /*)$ 6FKHPH ZKLFK ZLOO GHOLYHU EHQHWV WR *UHDWHU :HOOLQJWRQ ZLOO EHFRPH YLDEOH
The primary objective for Greater Wellingtons interest in LGFA is to lower the Greater Wellingtons cost of borrowing. There are no consequential changes the investment DFWLYLW\ FRPSRQHQW RI WKH /7&&3 WKRXJK WKHUH LV D related change to the liability management policy component which is discussed below. Liability management
Every submission will be: DFNQRZOHGJHG E\ *UHDWHU :HOOLQJWRQ LQ DFFRUGDQFH ZLWK WKH /*$ FRSLHG DQG PDGH DYDLODEOH WR WKH SXEOLF The LGA 2002 requires Greater Wellington to make all written submissions on this consultation available to the public. This requirement is subject to the provisions of the /RFDO *RYHUQPHQW 2IFLDO ,QIRUPDWLRQ DQG 0HHWLQJV $FW 1987. If you consider there to be compelling reasons why your contact details and/or submission should be kept FRQGHQWLDO \RX VKRXOG DGYLVH ZLWKLQ \RXU VXEPLVVLRQ The consultation process dates are as follows: 3 March March April and 20 May June 2011 -XQH 1 July 2011 adopts statement of proposal and summary of proposal submissions open submissions close at 4pm submissions heard Council considers outcome of consultation process QDO &RXQFLO GHFLVLRQ decision comes into effect
The liability management component of the TRMP will be amended to make it clear that Greater Wellington may SDUWLFLSDWH LQ WKH /*)$ 6FKHPH LQFOXGLQJ ERUURZLQJ from the LGFA and entering into the transactions relating to that borrowing described in paragraph 63 of the Information Memorandum. The primary objective of these changes is to allow borrowing by Greater Wellington at lower interest margins than it currently faces. Greater Wellington will also need to change the security arrangements it has in relation to its borrowing (and related incidental arrangements) from the exiting negative pledge deed arrangements to one under which its lenders are granted a charge over the rates and rates revenue of Greater Wellington. Opportunity to make Submissions This proposal and the summary of proposal will be GLVWULEXWHG DQG DYDLODEOH IRU LQVSHFWLRQ DQG FRS\LQJ DV required by section 83 of the Local Government Act 2002. This statement of proposal and the Information Memorandum is available for inspection at Greater :HOOLQJWRQ RIFHV DW :DNHHOG 6WUHHW :HOOLQJWRQ JURXQG RRU DQG RQ WKH &RXQFLOV ZHE VLWH www.gw.govt.nz. 6XEPLVVLRQV RQ WKLV SURSRVDO PXVW EH LQ ZULWLQJ XVLQJ the form attached or any other form) and addressed to *UHDWHU :HOOLQJWRQ 6XEPLVVLRQV PD\ EH VHQW HLWKHU E\ SRVW WR 3URSRVHG $QQXDO SODQ 6XPPDU\ FreePost 3156 Greater Wellington Regional Council PO Box 11646 0DQQHUV 6WUHHW Wellington 6142 RU E\ HPDLO WR LQIR#JZJRYWQ] 6XEPLVVLRQV PXVW EH UHFHLYHG QR ODWHU WKDQ SP RQ 28 April 2011. Any person or organisation who makes a submission has D ULJKW WR EH KHDUG E\ *UHDWHU :HOOLQJWRQ 6XEPLWWHUV ZKR wish to be heard must request this in their submission.
Appendix 1 Proposed Treasury Risk Management Policy wording
The following wording would be added into section 5 of current Policy: New Zealand Local Government Funding Agency Limited investment 'HVSLWH DQ\WKLQJ HDUOLHU LQ WKLV 3ROLF\ WKH &RXQFLO PD\ LQYHVW LQ VKDUHV DQG RWKHU QDQFLDO LQVWUXPHQWV of the New Zealand Local Government Funding $JHQF\ /LPLWHG /*)$ DQG PD\ ERUURZ WR IXQG WKDW investment. The Councils objective in making any such investment will be to: (a) obtain a return on the investment; and E HQVXUH WKDW WKH /*)$ KDV VXIFLHQW FDSLWDO WR EHFRPH DQG UHPDLQ YLDEOH PHDQLQJ WKDW LW FRQWLQXHV DV D source of debt funding for the Council. %HFDXVH RI WKLV GXDO REMHFWLYH WKH &RXQFLO PD\ LQYHVW LQ LGFA shares in circumstances in which the return on that investment is potentially lower than the return it could achieve with alternative investments. ,I UHTXLUHG LQ FRQQHFWLRQ ZLWK WKH LQYHVWPHQW WKH &RXQFLO may also subscribe for uncalled capital in the LGFA.
The following wording would be added into section 4 of the current Policy: New Zealand Local Government Funding Agency Limited Investment 'HVSLWH DQ\WKLQJ HDUOLHU LQ WKLV 3ROLF\ WKH &RXQFLO PD\ ERUURZ IURP WKH /*)$ DQG LQ FRQQHFWLRQ ZLWK WKDW ERUURZLQJ PD\ HQWHU LQWR WKH IROORZLQJ UHODWHG transactions to the extent it considers necessary or desirable: (a) contribute a portion of its borrowing back to the LGFA as an equity contribution to the LGFA; (b) provide guarantees of the indebtedness of other local authorities to the LGFA and of the indebtedness of the LGFA itself; (c) commit to contributing additional equity (or subordinated debt) to the LGFA if required; (d) subscribe for shares and uncalled capital in the LGFA; and H VHFXUH LWV ERUURZLQJ IURP WKH /*)$ DQG WKH performance of other obligations to the LGFA or its creditors with a charge over the Councils rates and rates revenue. The following wording would replace section 4.2 of the current Policy: Security and charges The Council operates under a negative pledge DUUDQJHPHQW ZKLFK LV DQ DUUDQJHPHQW XQGHU ZKLFK ZLWK some limited exceptions) it provides no security to any FUHGLWRU $OWKRXJK OHQGHUV DUH XQVHFXUHG WKH\ KDYH WKH EHQHW RI DQ XQGHUWDNLQJ WKDW RWKHU OHQGHUV ZLOO DOVR EH unsecured. This arrangement is created by the Councils Negative Pledge Deed. 7KH &RXQFLO PD\ MRLQ D VFKHPH /*)$ 6FKHPH under which it borrows from the New Zealand Local Government Funding Agency Limited (LGFA). One of WKH UHTXLUHPHQWV RI WKH /*)$ 6FKHPH LV WKDW WKH &RXQFLO grants a change over its rates and rates revenue to secure obligations related to its borrowing from the LGFA. It cannot do this under the current negative pledge DUUDQJHPHQW VR ZLOO QHHG WR UHSODFH WKH DUUDQJHPHQW LI LW MRLQV DQG /*)$ 6FKHPH )URP WLPH WR WLPH ZLWK SULRU &RXQFLO DSSURYDO VHFXULW\ maybe offered by providing a security interest in one or more of the Councils assets other than its rates and rates revenue.
6HFXULW\ LQWHUHVW LQ SK\VLFDO DVVHWV ZLOO RQO\ EH JUDQWHG when: WKHUH LV D GLUHFW UHODWLRQVKLS EHWZHHQ D GHEW DQG WKH purchase or construction of the secured assets which LW IXQGVHJ WKURXJK D QDQFH OHDVH RU VRPH IRUP RI SURMHFW QDQFH WKH &RXQFLO FRQVLGHUV D VHFXULW\ LQWHUHVW LQ WKH SK\VLFDO assets to be appropriate
WKH VHFXULW\ LQWHUHVW LV SHUPLWWHG E\ WKH 1HJDWLYH Pledge Deed (unless the Negative Pledge Deed has been terminated) ,Q DGGLWLRQ WKH &RXQFLO PD\ JUDQW VHFXULW\ LQWHUHVWV LQ physical assets where those security interests are leases or retention of the arrangements which arise under the terms of any lease or sale and purchase agreement.
Appendix 2 Information Memorandum
Proposed Local Government Funding Agency Scheme Information Memorandum Part A Introduction and purpose
Purpose of Information Memorandum 1. This Information Memorandum provides a description of a proposed funding structure for local DXWKRULWLHV /*)$ 6FKHPH ZKLFK LV GHVLJQHG WR enable participating local authorities (Participating Local Authorities) to borrow at lower interest margins than they would otherwise pay. 2. The purpose of this Information Memorandum is to provide information to supplement consultation materials prepared by local authorities consulting on ZKHWKHU WR SDUWLFLSDWH LQ WKH /*)$ 6FKHPH 3. This Information Memorandum is divided into three parts: D 7KLV 3DUW $ ,QWURGXFWLRQ DQG 3XUSRVH ZKLFK VHWV out the purpose of the Information Memorandum DQG SURYLGHV VRPH EDFNJURXQG RQ WKH SXUSRVH RI DQG UDWLRQDOH IRU WKH /*)$ 6FKHPH E 3DUW % +RZ WKH /*)$ 6FKHPH :RUNV ZKLFK VHWV RXW WKH FKDUDFWHULVWLFV RI WKH /*)$ 6FKHPH and the transactions that Participating Local Authorities will be entering into as part of their SDUWLFLSDWLRQ LQ WKH /*)$ 6FKHPH F 3DUW & /RFDO $XWKRULW\ &RVWV DQG %HQHWV ZKLFK VHWV RXW WKH FRVWV DQG EHQHWV WR LQGLYLGXDO ORFDO DXWKRULWLHV RI SDUWLFLSDWLQJ LQ WKH /*)$ 6FKHPH
Origin of the LGFA Scheme 7KH /*)$ 6FKHPH KDV EHHQ GHYHORSHG E\ D JURXS of New Zealand local authorities and central government over the last 18 months. That development has involved: (a) undertaking a detailed review and analysis of: (i) the current borrowing environment in which New Zealand local authorities borrow; and
Addressing the local authority debt issues 8. Each of these issues needs to be addressed to rectify this situation. This is not likely to happen without an LQWHUYHQWLRQ OLNH WKH /*)$ 6FKHPH IRU WKH IROORZLQJ reasons: (a) The New Zealand debt markets (at least in the foreseeable future) are likely to maintain the status quo. E ,QGLYLGXDOO\ ORFDO DXWKRULWLHV ZLOO QRW EH DEOH WR DWWDLQ VLJQLFDQW VFDOH H[FHSW RUJDQLFDOO\ LQ WKH long-term). (c) At a sector level it may be possible to address WKH LVVXH UHJDUGLQJ UHJXODWLRQ EXW UHJXODWRUV DUH OLNHO\ WR UHPDLQ UHOXFWDQW WR VLJQLFDQWO\ HDVH UHVWULFWLRQV RQ QDQFLDO PDQDJHPHQW DFURVV WKH VHFWRU ZLWKRXW JDLQLQJ VLJQLFDQW FRPIRUW DV WR WKH VRSKLVWLFDWLRQ RI WKH QDQFLDO PDQDJHPHQW of all local authorities. Even if this issue was DGGUHVVHG E\ UHJXODWRUV WKLV FKDQJH DORQH ZRXOG EH LQVXIFLHQW WR SURYLGH D PDMRU VWHS FKDQJH 7KH /*)$ 6FKHPH KDV EHHQ GHYHORSHG EHFDXVH WKH homogenous nature of local authorities; the large sector borrowing requirements and the high credit quality / strong security position (ie charge over UDWHV RI ORFDO DXWKRULWLHV FUHDWHV WKH RSSRUWXQLW\ IRU a centralised local authority debt vehicle to generate VLJQLFDQW EHQHWV 10. There are numerous precedents globally of successful vehicles which pool local authority debt and fund WKHPVHOYHV WKURXJK LVVXLQJ WKHLU RZQ QDQFLDO LQVWUXPHQWV WR LQYHVWRUV 6XFK YHKLFOHV DFKLHYH success through: (a) Credit rating arbitrage Attaining a credit rating higher than that of the individual underlying assets (local authority borrowers) and therefore being able to borrow at lower margins. (b) Economies of scale By pooling debt the vehicles can access a wider range of debt sources DQG VSUHDG [HG RSHUDWLQJ FRVWV WKHUHE\ UHGXFLQJ the $ cost per $ of debt raised. (c) Regulatory arbitrage The vehicles can receive different regulatory treatment than the underlying ORFDO DXWKRULWLHV LPSURYLQJ WKHLU DELOLW\ WR HIFLHQWO\ UDLVH GHEW HJ WKURXJK DFFHVV WR RIIVKRUH foreign currency debt markets. 11. The offshore precedents are typically owned by the local authorities in the relevant jurisdiction (often ZLWK FHQWUDO JRYHUQPHQW LQYROYHPHQW DQG WKDW LV ZKDW LV SURSRVHG KHUH WKURXJK WKH /*)$ 6FKHPH
(ii) centralised local authority debt vehicle structures that have been developed offshore to successfully lower the cost of local authority borrowing; (b) using this review and analysis to develop a IXQGLQJ VWUXFWXUH WKH /*)$ 6FKHPH ZKLFK LV DQWLFLSDWHG WR GHOLYHU VLJQLFDQW EHQHWV WR 1HZ Zealand local authorities; F FRQUPLQJ ZLWK UDWLQJ DJHQFLHV WKDW WKH SURSRVHG /*)$ 6FKHPH FDQ DFKLHYH D KLJK HQRXJK FUHGLW UDWLQJ WR GHOLYHU WKH DQWLFLSDWHG EHQHWV (d) obtaining formal central government support to IDFLOLWDWH HVWDEOLVKPHQW RI WKH /*)$ 6FKHPH Rationale for LGFA Scheme New Zealand Local Authority debt market 5. New Zealand local authorities face a number of debt related issues. )LUVW ORFDO DXWKRULWLHV KDYH VLJQLFDQW H[LVWLQJ DQG forecast debt requirements. Current long-term council community plans indicate that local authority debt ZLOO GRXEOH RYHU WKH QH[W YH \HDUV WR RYHU ELOOLRQ 6HFRQGO\ SULFLQJ OHQJWK RI IXQGLQJ WHUP DQG RWKHU terms and conditions vary considerably across the sector and are less than optimal. This is due to: (a) Limited debt sources Local authorities debt IXQGLQJ RSWLRQV DUH OLPLWHG WR WKH EDQNV SULYDWH placements and wholesale bonds (issuance to ZKROHVDOH LQYHVWRUV DQG WR D OHVVHU H[WHQW UHWDLO bonds. Increasing local authority sector funding requirements and domestic funding capacity constraints are likely to further negatively impact SULFLQJ WHUPV DQG FRQGLWLRQV DQG H[LELOLW\ RI local authority sector debt. (b) Fragmented sector There are 78 local authorities. ,QGLYLGXDOO\ D VLJQLFDQW SURSRUWLRQ RI WKHVH local authorities lack scale - the 10 largest account for ~68% of total sector borrowings with average borrowings of ~$470 million and the remaining 68 have average debt of ~$33million. (c) Regulatory restrictions - Offshore (foreign currency) capital markets are closed to local authorities and the compliance process for local authority retail bond issuance is burdensome and generally restricts issuance to a six month window.
Part B How the LGFA scheme works
Basic structure of the LGFA Scheme 7KH EDVLF VWUXFWXUH RI WKH /*)$ 6FKHPH LV WKDW D company is established which will borrow funds and lend them on to local authorities at lower interest margins than those local authorities would pay to other OHQGHUV )RU D QXPEHU RI UHDVRQV GLVFXVVHG EHORZ LW LV expected that the company will be able to borrow at low enough interest margins to be able to do this. New Zealand Local Government Funding Agency Limited 13. The company which will be lending to local DXWKRULWLHV XQGHU WKH /*)$ 6FKHPH KDV QRW \HW EHHQ HVWDEOLVKHG EXW LW LV H[SHFWHG WR EH FDOOHG WKH 1HZ Zealand Local Government Funding Agency Limited /*)$ ,W ZLOO EH D OLPLWHG OLDELOLW\ FRPSDQ\ DQG LWV shares will be held entirely by central government and by local authorities. 14. At this stage the exact percentage of shares that will be KHOG E\ FHQWUDO JRYHUQPHQW KDV QRW EHHQ QDOLVHG EXW LW ZLOO EH OHVV WKDQ RU HTXDO WR PHDQLQJ PRUH WKDQ or more of the shares will be held by local authorities. &RQVHTXHQWO\ WKH /*)$ ZLOO EH D FRXQFLOFRQWUROOHG RUJDQLVDWLRQ )XUWKHU LW LV LQWHQGHG WKDW WKH /*)$ WXUQ D VPDOO SURW DW OHDVW LQ WKH PHGLXP WR ORQJ WHUP VR LW ZLOO be a council-controlled trading organisation. 15. The LGFA will be established solely for the purposes RI WKH /*)$ 6FKHPH DQG LWV DFWLYLWLHV ZLOO EH OLPLWHG WR SHUIRUPLQJ LWV IXQFWLRQ XQGHU WKH /*)$ 6FKHPH 16. It is anticipated that a small number of local DXWKRULWLHV 3ULQFLSDO 6KDUHKROGLQJ /RFDO $XWKRULWLHV ZLOO KROG PRVW LI QRW DOO RI WKRVH VKDUHV WKDW DUH not held by central government. The Principal 6KDUHKROGLQJ /RFDO $XWKRULWLHV ZLOO FRQWULEXWH FDSLWDO DQG DV FRPSHQVDWLRQ IRU WKHLU FDSLWDO FRQWULEXWLRQ will receive a pre-determined return on this capital. +RZHYHU WKH RYHUDUFKLQJ REMHFWLYH LV WKDW WKH EHQHWV RI WKH /*)$ 6FKHPH DUH SDVVHG WR ORFDO DXWKRULWLHV DV ORZHU ERUURZLQJ PDUJLQV UDWKHU WKDQ EHLQJ SDVVHG WR VKDUHKROGHUV DV PD[LPLVHG SURWV $V GLVFXVVHG EHORZ LW LV SRVVLEOH WKDW WKH ORFDO DXWKRULWLHV RXWVLGH WKH 3ULQFLSDO 6KDUHKROGLQJ /RFDO Authority group will hold some shares in the LGFA as ZHOO EXW WKLV DVSHFW RI WKH /*)$ 6FKHPH KDV QRW \HW EHHQ QDOLVHG Design to minimise default risk 2QH RI WKH WKLQJV ZKLFK LV FULWLFDO WR WKH /*)$ 6FKHPH GHOLYHULQJ LWV DQWLFLSDWHG EHQHWV LV WKH DFKLHYHPHQW of a high credit rating for the LGFA (to achieve the credit rating arbitrage referred to in paragraph 10(a).
Consequently there are a number of features of the /*)$ 6FKHPH ZKLFK DUH LQFOXGHG WR SURYLGH WKH protections for creditors which rating agencies require before agreeing to a high credit rating. These features are described in paragraphs 19 to 54 below. %HIRUH DJUHHLQJ WR D KLJK FUHGLW UDWLQJ UDWLQJ DJHQFLHV will consider the risks of both short term and long WHUP GHIDXOW 6KRUW WHUP GHIDXOW LV ZKHUH D SD\PHQW obligation is not met on time. Long term default is where a payment obligation is never met. In many cases short term default will inevitably translate into ORQJ WHUP GHIDXOW EXW WKLV LV QRW DOZD\V WKH FDVH D short term default may be caused by a temporary liquidity problem (ie a temporary shortage of readily available cash). Features of the LGFA Scheme designed to reduce short term default risk :KHQ D ORFDO DXWKRULW\ ERUURZV WKH ULVN RI VKRUW WHUP GHIDXOW DOWKRXJK ORZ LV SUREDEO\ VLJQLFDQWO\ higher than its risk of long term default. In the long WHUP LW FDQ DVVHVV DQG FROOHFW VXIFLHQW UDWHV UHYHQXH WR FRYHU DOPRVW DQ\ VKRUWIDOO EXW VXFK UHYHQXH FDQQRW EH FROOHFWHG TXLFNO\ &RQVHTXHQWO\ WKHUH LV D ULVN WKDW inadequate liability and revenue management could lead to temporary liquidity problems and short term default. 21. The principal asset of the LGFA will be local authority GHEW VR VXFK WHPSRUDU\ OLTXLGLW\ ULVNV DUH HIIHFWLYHO\ SDVVHG RQ WR WKH /*)$ &RQVHTXHQWO\ WKH UDWLQJ agencies will look for safeguards to ensure that liquidity problems of a Participating Local Authority will not lead to a default by the LGFA. 22. There are two principal safeguards that the LGFA will put in place to manage short term default (liquidity) risk: (a) It will hold a certain amount of cash and other liquid investments (investments which can be quickly turned into cash). (b) It will have a borrowing facility with central government which allows it to borrow funds from central government if required. ,W LV H[SHFWHG WKDW WKHVH VDIHJXDUGV ZLOO VXIFLHQWO\ reduce any short term default risk. Features of the LGFA Scheme designed to reduce long term default risk 24. There are a number of safeguards that the LGFA will SXW LQ SODFH WR PDQDJH ORQJ WHUP GHIDXOW ULVN WKH most important of which are set out below:
(a) The LGFA will require all local authorities that borrow from it to secure that borrowing with a charge over that local authoritys rates and rates revenue (Rates Charge). (b) The LGFA will maintain a minimum capital adequacy ratio (or have some equivalent capital adequacy safeguard). F 7KH 3ULQFLSDO 6KDUHKROGLQJ /RFDO $XWKRULWLHV ZLOO be required to subscribe for uncalled capital in an equal amount to their paid up equity contribution. G 7KH /*)$ ZLOO UHTXLUH PRVW RU SRVVLEO\ DOO Participating Local Authorities (Guaranteeing Local Authorities) to guarantee the obligations of all other Guaranteeing Local Authorities and the obligations of the LGFA. (e) The Guaranteeing Local Authorities will commit to contributing additional equity to the LGFA if there an imminent risk that the LGFA will default. (f) The LGFA will hedge any exposure to interest rate DQG IRUHLJQ FXUUHQF\ XFWXDWLRQV WR HQVXUH WKDW VXFK XFWXDWLRQV GR QRW VLJQLFDQWO\ DIIHFW LWV ability to meet its payment obligations. (g) The LGFA will put in place risk management policies in relation to its borrowing and lending GHVLJQHG WR PLQLPLVH LWV ULVN )RU H[DPSOH LW ZLOO impose limits on the percentage of lending which is made to any one local authority to ensure that LWV FUHGLW ULVN LV VXLWDEO\ GLYHUVLHG (h) The LGFA will ensure that its operations are run in a way which minimises operational risk. It will do this from commencement of operations by outsourcing its operations to the New Zealand 'HEW 0DQDJHPHQW 2IFH 1='02 ZKLFK LV SDUW of The Treasury. NZDMO manages the capital UDLVLQJ IRU FHQWUDO JRYHUQPHQW DQG KDV UREXVW processes in place to manage operational risk. It is possible that at some point the operations IXQFWLRQ ZLOO EH PRYHG IURP 1='02 EXW WKLV ZLOO QRW EH GRQH XQOHVV WKH /*)$ LV VDWLVHG WKDW it has alternative robust processes in place. 25. Additional detail in relation to the features referred to in paragraphs 24(a) to 24(e) is set out below. Rates Charge 26. All local authorities borrowing from the LGFA will be required to secure that borrowing with a Rates &KDUJH 0DQ\ EXW QRW DOO ORFDO DXWKRULWLHV KDYH D Rates Charge in place already.
7KLV LV D SRZHUIXO IRUP RI VHFXULW\ IRU WKH /*)$ EHFDXVH LW PHDQV WKDW LI WKH UHOHYDQW ORFDO DXWKRULW\ GHIDXOWV D UHFHLYHU DSSRLQWHG E\ WKH /*)$ FDQ DVVHVV DQG FROOHFW VXIFLHQW UDWHV LQ WKH UHOHYDQW district or region to recover the defaulted payments. &RQVHTXHQWO\ LW VLJQLFDQWO\ UHGXFHV WKH ULVN RI ORQJ term default by a local authority borrower. 28. From a local authoritys point of view it is also DGYDQWDJHRXV EHFDXVH VR ORQJ DV WKH ORFDO DXWKRULW\ GRHV QRW GHIDXOW LW LV HQWLWOHG WR FRQGXFW LWV DIIDLUV without any interference or restriction. This contrasts ZLWK PRVW VHFXULW\ DUUDQJHPHQWV ZKLFK LQYROYH restrictions being imposed on a borrowers use of its own assets by the relevant lender. Minimum capital 29. One important safeguard against long-term default for the LGFA will be having a minimum capital adequacy ratio (a ratio which measures the relative amounts of equity and debt-based assets which an HQWLW\ KDV 7KLV UDWLR LV LPSRUWDQW EHFDXVH LW SURYLGHV an indication of the ability of the LGFA to ultimately repay all of its debts despite local authorities that have borrowed from it defaulting or some other loss occurring. 30. The minimum capital adequacy ratio requirement is likely to be that the equity of the LGFA is an amount equal to at least 1.6% of its total assets. Sources of equity for capital adequacy purposes 31. The equity held by the LGFA to ensure that it meets its minimum capital adequacy ratio requirement will FRPH IURP WZR VRXUFHV )LUVW FHQWUDO JRYHUQPHQW DQG WKH 3ULQFLSDO 6KDUHKROGLQJ /RFDO $XWKRULWLHV will contribute initial equity as the issue price of their LQLWLDO VKDUHKROGLQJV 6HFRQGO\ LW LV DQWLFLSDWHG WKDW HDFK 3DUWLFLSDWLQJ /RFDO $XWKRULW\ ZLOO DW WKH WLPH WKDW LW ERUURZV IURP WKH /*)$ FRQWULEXWH VRPH RI that borrowing back as equity. 7KH ZD\ WKH VHFRQG VRXUFH RI HTXLW\ ZLOO ZRUN LV WKDW ZKHQHYHU D 3DUWLFLSDWLQJ /RFDO $XWKRULW\ ERUURZV it will not receive the full amount of the borrowing LQ FDVK ,QVWHDG D VPDOO SHUFHQWDJH RI WKH ERUURZHG amount will remain with the LGFA as equity. That percentage is expected to be 1.6% of the amount borrowed. 33. The equity contributed in this way will be repaid ZKHQ WKH ERUURZLQJ LV UHSDLG VR LQ HIIHFW WKH amount which must be repaid will equal the cash amount actually advanced.
34. The equity will be contributed by subscribing IRU %RUURZHU 1RWHV ,W LV OLNHO\ WKRXJK QRW \HW QDOO\ GHFLGHG WKDW WKHVH %RUURZHU 1RWHV ZLOO EH redeemable preference shares in the LGFA. 7R LOOXVWUDWH ZLWK DQ H[DPSOH LI D ORFDO DXWKRULW\ ERUURZHG IRU YH \HDUV IURP WKH /*)$ LW ZRXOG UHFHLYH LQ FDVK DQG RI Borrower Notes (likely to be redeemable preference VKDUHV LQ WKH /*)$ $W WKH HQG RI WKH YH \HDUV LW ZRXOG UHSD\ EXW ZRXOG VLPXOWDQHRXVO\ UHGHHP LWV %RUURZHU 1RWHV IRU PHDQLQJ LWV QHW UHSD\PHQW ZDV HTXDO WR WKH LW LQLWLDOO\ received in cash. $ UHWXUQ ZLOO EH SDLG RQ WKH %RUURZHU 1RWHV which will be in the form of a dividend if they are redeemable preference shares. The exact amount of WKDW UHWXUQ LV QRW \HW QDOO\ GHFLGHG EXW LV OLNHO\ WR be equal to the cost of funds of the LGFA. While it LV DQWLFLSDWHG WKDW WKLV UHWXUQ ZLOO EH SDLG LW ZLOO EH paid at the discretion of the LGFA. It is likely that this return will be capitalised and paid at maturity. 37. There is some additional risk to Participating /RFDO $XWKRULWLHV IURP WKLV DUUDQJHPHQW EHFDXVH redemption of the Borrower Notes will only occur if WKH /*)$ LV DEOH WR SD\ LWV RWKHU GHEWV )RU H[DPSOH LI DW WKH HQG RI YH \HDUV WKH /*)$ ZDV LQVROYHQW WKH ORFDO DXWKRULW\ ZRXOG KDYH WR UHSD\ EXW ZRXOG QRW UHFHLYH LWV EDFN IRU UHGHHPLQJ LWV Borrower Notes. Uncalled capital (DFK 3ULQFLSDO 6KDUHKROGLQJ /RFDO $XWKRULW\ ZLOO EH required to subscribe for uncalled capital which is equal in amount to its paid up equity contribution (Uncalled Capital). 39. It is anticipated that the Uncalled Capital will only be able to be called by the LGFA if it determines that there is a risk of imminent default if the call is not PDGH +RZHYHU VXFK D FDOO LV OLNHO\ WR EH PDGH EHIRUH the Guarantee or additional equity commitment described below are utilised. Guarantee 0RVW LI QRW DOO 3DUWLFLSDWLQJ /RFDO $XWKRULWLHV ZLOO be required to enter into a guarantee when they join WKH /*)$ 6FKHPH *XDUDQWHH 8QGHU WKH *XDUDQWHH the Guaranteeing Local Authorities guarantee the payment obligations of other Guaranteeing Local $XWKRULWLHV WR WKH /*)$ &URVV *XDUDQWHH DQG guarantee the payment obligations of the LGFA itself (LGFA Guarantee).
Risk from Cross Guarantee 7KHUH DUH YH IDFWRUV ZKLFK PLWLJDWH WKH ULVN WR Guaranteeing Local Authorities under the Cross Guarantee: (a) The risk only materialises if another Participating Local Authority defaults on its debt obligations. It LV EHOLHYHG WKDW QR VXFK GHIDXOW KDV HYHU RFFXUUHG which suggests that the risk of a local authority default is very low. E ,I D 3DUWLFLSDWLQJ /RFDO $XWKRULW\ GHIDXOWV EXW it is because of temporary liquidity problems RQO\ WKH VDIHJXDUGV LQ SODFH WR FRYHU WHPSRUDU\ OLTXLGLW\ VKRUWDJHV PD\ EH VXIFLHQW IRU WKH /*)$ never to have to call upon the Cross Guarantee. The detail of when the LGFA will be able to call XSRQ WKH &URVV *XDUDQWHH LV QRW \HW QDOLVHG EXW it is likely that it will be restricted to situations in which there is a risk of an imminent default by the LGFA. (c) It is anticipated that the Guarantee will only be called if a call on the Uncalled Capital does not JHQHUDWH VXIFLHQW IXQGV WR HOLPLQDWH WKH ULVN RI an imminent default by the LGFA. G ,I D 3DUWLFLSDWLQJ /RFDO $XWKRULW\ GHIDXOWV WKH burden will be shared by all Guaranteeing Local Authorities. H ,I D 3DUWLFLSDWLQJ /RFDO $XWKRULW\ GHIDXOWV WKH LGFA will exercise its rights under the Rates Charge to recover the payments defaulted on. The funds recovered through that exercise of rights will be passed on to the local authorities who have PDGH SD\PHQW XQGHU WKH &URVV *XDUDQWHH VR WKRVH ORFDO DXWKRULWLHV VKRXOG LQ WKH ORQJ WHUP EH UHLPEXUVHG IRU D VLJQLFDQW SRUWLRQ LI QRW DOO of the amount they have paid under the Cross Guarantee. The statutory processes involved in exercising these rights suggest that funds will be able to be recovered within 18 months of default.
41. The purpose of the Guarantee is to provide additional comfort to lenders (and therefore credit rating DJHQFLHV WKDW WKHUH ZLOO EH QR ORQJ WHUP GHIDXOW though it may also be used to cover a short term default if there is a default which cannot be covered using the protections described in paragraphs 20 to DERYH EXW ZKLFK ZLOO XOWLPDWHO\ EH IXOO\ FRYHUHG using the rates charge described in paragraphs 26 to 28. The Guarantee allows the LGFA to draw upon the resource of all Guaranteeing Local Authorities to avoid defaults.
LGFA Guarantee 43. The LGFA Guarantee will only ever be called if the /*)$ GHIDXOWV &RQVHTXHQWO\ D FDOO RQ WKH /*)$ Guarantee will only occur if the numerous safeguards put in place to prevent an LGFA default fail. This is highly unlikely to happen. ,I DQ\ VXFK GHIDXOW GLG RFFXU DQG WKH *XDUDQWHHLQJ Local Authorities were called on under the LGFA Guarantee they could potentially be called on to FRYHU DQ\ SD\PHQW REOLJDWLRQ RI WKH /*)$ 6XFK payment obligations may (without limitation) include obligations under the following transactions: (a) A failure by the LGFA to pay its principal lenders. (b) A failure by the LGFA to repay drawings under the liquidity facility with central government. (c) A failure by the LGFA to make payments under the hedging transactions referred to in paragraph 24(f). Guarantee risk shared $OWKRXJK WKH GHWDLO LV QRW \HW QDOLVHG WKHUH ZLOO EH D mechanism to ensure that payments made under the Guarantee are shared between all Guaranteeing Local Authorities. The proportion of any payments borne by a single Guaranteeing Local Authority is likely to be based on the number of ratepayers in its district or UHJLRQ RU RQ VRPH RWKHU VWDWLVWLF ZKLFK LV D SUR[\ IRU its relative ability to make payments. Rates Charge 46. It is possible that Guaranteeing Local Authorities will be required to provide a Rates Charge to secure their obligations under the Guarantee. Benets of being a Guaranteeing Local Authority 47. If some Participating Local Authorities are permitted not to be Guaranteeing Local Authorities it will be on the basis that their borrowings are only allowed to reach a limited level. The exact limitation is not \HW QDOLVHG EXW LV OLNHO\ WR EH OHVV WKDQ 6XFK ORFDO DXWKRULWLHV ZLOO DOVR EH UHTXLUHG WR SD\ KLJKHU IXQGLQJ FRVWV HLWKHU E\ SD\LQJ KLJKHU LQWHUHVW margins or through some other mechanism. *XDUDQWHHLQJ /RFDO $XWKRULWLHV ZLOO WKHUHIRUH KDYH WKH EHQHW RI QRW KDYLQJ WKLV ORZ OLPLW RQ ERUURZLQJ and paying lower funding costs. Additional equity commitment 49. In addition to the equity contributions made in FRQMXQFWLRQ ZLWK ERUURZLQJ DOO *XDUDQWHHLQJ /RFDO Authorities are likely to be required to commit to contributing equity if required under certain circumstances. It is expected that calls on any such commitments will be limited to situations in which there is a risk of imminent default by the LGFA.
50. A call for additional equity contributions will only be made if calls on the uncalled Capital and on the Cross *XDUDQWHH ZLOO QRW EH VXIFLHQW WR HOLPLQDWH WKH ULVN RI LPPLQHQW GHIDXOW E\ WKH /*)$ &RQVHTXHQWO\ WKH factors which limit the risk in relation to the Cross Guarantee also apply here. ,W LV QRW \HW QDOLVHG ZKDW IRUP WKH DGGLWLRQDO HTXLW\ contributions will take. ,I DQ DGGLWLRQDO HTXLW\ FRQWULEXWLRQ LV UHTXLUHG the LGFA will lend the money required to make that contribution to the relevant local authority. )RU H[DPSOH LI ZDV UHTXLUHG WKH /*)$ PLJKW LVVXH RI VKDUHV WR WKH ORFDO DXWKRULW\ DQG LQ UHWXUQ WKH ORFDO DXWKRULW\ ZRXOG RZH LW D GHEW RI &RQVHTXHQWO\ WKHUH ZRXOG EH QR requirement on the local authority to immediately PDNH D FDVK SD\PHQW +RZHYHU VXFK D GHEW ZRXOG ultimately have to be paid if the LGFA never regained a position in which it could buy back the shares. 53. It is possible that Guaranteeing Local Authorities will be required to provide a Rates Charge to secure their obligations to contribute additional equity. Initial purchase of a single share 54. It is possible that Guaranteeing Local Authorities may be required to initially subscribe for 1 share in WKH /*)$ 7KLV LV VR WKDW LI WKH\ KDYH DQ RQJRLQJ FRPPLWPHQW WR VXEVFULEH IRU VKDUHV ZKHQ UHTXLUHG they will already be a shareholder in the LGFA. The VLJQLFDQFH RI WKLV LV WKDW WKH\ ZLOO QRW EH UHTXLUHG ZKHQ VXEVFULELQJ IRU IXUWKHU VKDUHV WR JR WKURXJK WKH special consultative process associated with becoming a shareholder in a council-controlled organisation. Characteristics designed to make the LGFA Scheme fair for all Participating Local Authorities 7KH SULQFLSDO ULVN LQYROYHG ZLWK WKH /*)$ 6FKHPH is that Participating Local Authorities will default on WKHLU SD\PHQW REOLJDWLRQV 7KH JUHDWHU WKLV ULVN LV WKH OHVV DWWUDFWLYH SDUWLFLSDWLRQ LQ WKH /*)$ 6FKHPH LV IRU all Participating Local Authorities. 56. The Participating Local Authorities do not create this risk in equal amounts. There are some that carry D JUHDWHU GHIDXOW ULVN WKDQ RWKHUV DQG WKHUHIRUH contribute disproportionately to the overall risk in WKH /*)$ 6FKHPH 7KRVH ORFDO DXWKRULWLHV DUH DOVR the local authorities that would be likely to pay the highest interest margins if they borrowed outside the /*)$ 6FKHPH DQG VR SRWHQWLDOO\ EHQHW WKH PRVW IURP WKH /*)$ 6FKHPH 7R DYRLG RU DW OHDVW PLQLPLVH ZKDW LV HIIHFWLYHO\ FURVV subsidisation of the higher risk local authorities by WKH ORZHU ULVN ORFDO DXWKRULWLHV LW LV DQWLFLSDWHG WKDW
different interest margins will be paid by different ORFDO DXWKRULWLHV ZKHQ WKH\ ERUURZ IURP WKH /*)$ with those carrying the higher default risk paying the higher interest margins. Viability of the LGFA Scheme dependent on participation levels 58. The modelling and other analysis done by Cameron 3DUWQHUV DQG $VLD 3DFLF 5LVN 0DQDJHPHQW $350 VXJJHVWV WKDW WKH /*)$ 6FKHPH ZLOO EH YLDEOH LQ WKDW LW ZLOO GHOLYHU VXIFLHQW EHQHWV WR MXVWLI\ LWV establishment and continued existence) if: (a) the LGFA attains a high enough credit rating; and E VXIFLHQW IXQGV DUH ERUURZHG WKURXJK LW WR REWDLQ WKH HFRQRPLHV RI VFDOH EHQHWV UHIHUUHG WR LQ paragraph 10(b). 59. Discussions with rating agencies to date about the FUHGLW UDWLQJ KDYH EHHQ SURPLVLQJ DQG FRQVLGHUDEOH work has gone into a design which will achieve this FUHGLW UDWLQJ +RZHYHU D KLJK FUHGLW UDWLQJ ZLOO RQO\ EH DWWDLQDEOH LI DPRQJ RWKHU WKLQJV VXIFLHQW FDSLWDO is initially contributed. &RQVHTXHQWO\ WKH SDUWLFLSDWLRQ RI VXIFLHQW ORFDO DXWKRULWLHV ERWK LQLWLDOO\ DV 3ULQFLSDO 6KDUHKROGLQJ Local Authorities (to contribute initial capital) and in meeting their ongoing borrowing requirements WKURXJK WKH /*)$ 6FKHPH LV FULWLFDO ,W LV DQWLFLSDWHG WKDW 3ULQFLSDO 6KDUHKROGLQJ /RFDO Authorities will need to collectively contribute $20 million by way of initial capital contribution. What this amounts to on a per-local authority basis will GHSHQG RQ WKH QXPEHU RI 3ULQFLSDO 6KDUHKROGLQJ Local Authorities. ,W LV OLNHO\ WKDW 3ULQFLSDO 6KDUHKROGLQJ /RFDO Authorities will be required to meet a certain proportion of their borrowing needs through the /*)$ 6FKHPH IRU DQ LQLWLDO SHULRG WR HQVXUH WKDW WKH critical amount of utilisation is achieved. Summary of transactions a Council will enter into if it joins the LGFA Scheme ,I D &RXQFLO MRLQV WKH /*)$ 6FKHPH DV D 3ULQFLSDO 6KDUHKROGLQJ /RFDO $XWKRULW\ LW ZLOO (a) subscribe for shares in the LGFA to provide it with capital (see paragraphs 16 and 31); (b) possibly commit to meeting a certain proportion of its borrowing needs from the LGFA (see paragraph 62); (c) borrow from the LGFA; (d) subscribe for Uncalled Capital in the LGFA (see discussion in paragraphs 38 to 39 above);
(e) subscribe for Borrower Notes (see discussion in paragraphs 32 to 37; (f) enter into the Guarantee (see discussion in paragraphs 40 to 45 above); (g) commit to providing additional equity to the LGFA under certain circumstances (see discussion in paragraphs 49 to 53 above); (h) possibly purchase one share in the LGFA at the WLPH RI MRLQLQJ WKH /*)$ 6FKHPH VHH GLVFXVVLRQ in paragraph 54 above); and (i) provide a Rates Charge to secure some or all RI LWV REOLJDWLRQV XQGHU WKH /*)$ 6FKHPH VHH GLVFXVVLRQ LQ SDUDJUDSKV WR DQG above). ,I D &RXQFLO MRLQV WKH /*)$ 6FKHPH DV D *XDUDQWHHLQJ /RFDO $XWKRULW\ EXW QRW DV D 3ULQFLSDO 6KDUHKROGLQJ /RFDO $XWKRULW\ LW ZLOO HQWHU LQWR WKH WUDQVDFWLRQV GHVFULEHG LQ SDUDJUDSK RWKHU WKDQ WKRVH GHVFULEHG LQ SDUDJUDSKV D E DQG G ,I D &RXQFLO MRLQV WKH /*)$ 6FKHPH EXW QRW DV D Guaranteeing Local Authority (and therefore also not DV D 3ULQFLSDO 6KDUHKROGLQJ /RFDO $XWKRULW\ LW ZLOO only enter into the transactions described in paragraph 63(a) and 63(i).
Part C - Local authority costs and benets
7KH FRVWV DQG EHQHWV WR D 3DUWLFLSDWLQJ /RFDO Authority will depend on whether it participates DV D 3ULQFLSDO 6KDUHKROGLQJ /RFDO $XWKRULW\ D *XDUDQWHHLQJ /RFDO $XWKRULW\ RU DV QHLWKHU Benets to local authorities that borrow through the LGFA Scheme 67. It is anticipated that the LGFA will be able to borrow DW D ORZ HQRXJK UDWH IRU WKH /*)$ 6FKHPH WR EH attractive because of the three key advantages the LGFA will have over a local authority borrower described in paragraph 10. That is exploiting a credit UDWLQJ DUELWUDJH HFRQRPLHV RI VFDOH DQG D UHJXODWRU\ arbitrage. ,Q DGGLWLRQ WKH /*)$ ZLOO SURYLGH ORFDO DXWKRULWLHV with increased certainty of access to funding and terms and conditions (including the potential access WR ORQJHU IXQGLQJ WHUPV HJ a \UV 69. The potential savings for a local authority in terms of funding costs will depend on the difference between the funding cost to that local authority when it borrows from the LGFA and the funding cost to the local authority when it borrows from alternative sources. This difference will vary between local authorities.
70. The funding costs each local authority pays when it borrows from the LGFA will be affected by the IROORZLQJ IDFWRUV VRPH RI ZKLFK DUH VSHFLF WR WKH local authority: (a) the borrowing margin of the LGFA; (b) the operating costs of the LGFA; (c) any price adjustment made by the LGFA for that VSHFLF ORFDO DXWKRULW\ DV D UHVXOW RI (i) the credit quality of the local authority;
F LQ WKH FDVH RI DOO 3DUWLFLSDWLQJ /RFDO $XWKRULWLHV the LGFA is not able to redeem their Borrower Notes (see discussion in paragraphs 32 to 37). 76. Each of these risks is discussed in some detail in the paragraphs indicated next to the relevant risk. For the UHDVRQV VHW RXW LQ WKRVH GLVFXVVLRQV LW LV DQWLFLSDWHG that each of the risks is low. Cost of Borrower Notes $V GLVFXVVHG LQ SDUDJUDSKV WR DOO 3DUWLFLSDWLQJ Local Authorities will be required to invest in Borrower Notes when they borrow from the LGFA. This carries a cost in addition to the risk referred to in SDUDJUDSK F EHFDXVH WKH LQYHVWPHQW LQ %RUURZHU 1RWHV ZLOO EH IXQGHG E\ ERUURZLQJ IURP WKH /*)$ and the cost of this funding will be higher than the return paid on the Borrower Notes. 78. It is anticipated that the Borrower Notes will pay a discretionary payment equal to the LGFAs own cost of funds. Any discretionary payment is likely to be capitalised until maturity. $V QRWHG LQ SDUDJUDSK ZKLOH LW LV WKH LQWHQWLRQ for the LGFA to always pay the proposed annual SD\PHQW RQ WKH %RUURZHU 1RWHV VXFK SD\PHQWV DUH DW WKH /*)$V GLVFUHWLRQ VR LQ VRPH VLWXDWLRQV WKRVH payments may not be made. Cost/benet analysis for the investment by Principal Shareholding Local Authorities ,Q DGGLWLRQ WR WKRVH FRVWV DQG EHQHWV WKDW DOO Participating Local Authorities are expected to UHFHLYH LQ UHODWLRQ WR WKHLU ERUURZLQJ IURP WKH /*)$ 3ULQFLSDO 6KDUHKROGLQJ /RFDO $XWKRULWLHV ZLOO DOVR KROG VKDUHV LQ WKH /*)$ (VWDEOLVKPHQW 6KDUHV 81. Establishment shares will pay a discretionary annual payment which is an amount up to the LGFAs own cost of funds plus 200 bps.1 82. While it is the intention for the LGFA to always pay the SURSRVHG DQQXDO SD\PHQW RQ WKH (VWDEOLVKPHQW 6KDUHV WKLV SD\PHQW ZLOO QRW EH PDGH RU ZLOO EH UHGXFHG LI WKH performance of the LGFA means that the LGFA does not consider it appropriate to make the payment. $Q\ ORFDO DXWKRULW\ LQYHVWRU LQ (VWDEOLVKPHQW 6KDUHV will also be required to subscribe for the same amount of Uncalled Capital in the LGFA. This Uncalled Capital can be called at the discretion of the LGFA under certain circumstances to ensure the ongoing viability of the LGFA. Once called the Uncalled &DSLWDO LV FDOOHG LW ZLOO KDYH WKH VDPH FKDUDFWHULVWLFV DV (VWDEOLVKPHQW 6KDUHV 7KLV LV DQ DGGLWLRQDO risk (and therefore contingent cost) for Principal 6KDUHKROGLQJ /RFDO $XWKRULWLHV 8QFDOOHG &DSLWDO LV discussed in more detail in paragraphs 38 to 39 above.
Potential LGFA 5 Year Pricing Benets (all bps*) LA Borrowers LGFA Borrowing Margin LGFA Operating Costs & Investor Returns LGFA Pricing Adjustment LGFA Pricing Standalone LA Borrowing Rate Potential LA Savings
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SAFETY DATA SHEET
Material safety data sheet
Last changed: 01-08-2007
1. IDENTIFICATION OF PRODUCT AND COMPANY TRADE NAME APPLICATION Supplier Address Postal code Country Telephone Fax Contact person e-mail LGFA 1 SKF food compatible grease. SKF Maintenance Products Postbus 1008 NL-3430 BA Nieuwegein The Netherlands +6307200 +6307205 Sbastien David email@example.com
2. HAZARDS IDENTIFICATION EMERGENCY OVERVIEW Appearance/Odor: White grease/Mild POTENTIAL HEALTH EFFECTS: See section 11 for more information Likely routes of exposure: Ingestion, eye and skin contact. This product does not contain any carcinogens or potential carcinogens as listed by OSHA, IARC or NTP. POTENTIAL ENVIRONMENTAL EFFECTS: See section 12 for more information None OSHA REGULATORY STATUS This material is not considered hazardous by the OSHA Hazard Communication Standard (29 CFR 1910.1200) 3. COMPOSITION/INFORMATION ON INGREDIENTS CAS No. 1314-13-2 471-34-1 8042-47-5 9003-29-6 Component Zinc oxide Calcium-carbonate White mineral oil (petroleum) Butene, homopolymer Aluminium complex thickener w/w% 7-13 3-10 50-80 7-13 7-13
4. FIRST AID MEASURES By inhalation: Seek fresh air. By ingestion: Wash out mouth thoroughly and drink 1-2 glasses of water in small sips. Seek medical advice in case of persistent discomfort. By skin contact: Remove contaminated clothing. Wash skin with soap and water. By eye contact: Open eye wide, remove any contact lenses and flush immediately with water (preferably using eye wash equipment). Seek medical advice if symptoms persist. Other information: Symptoms: See section 11. Bring the material safety data sheet or label when seeking medical advice.
5. FIRE FIGHTING MEASURES Extinguish with powder, foam, carbon dioxide or water mist. Do not use a jet of water, as it may spread the fire. Use water or water mist to cool non-ignited inventory. Move containers from danger area if it can not be done without risk. Avoid inhalation of vapour and smoke gases seek fresh air.
6. ACCIDENTAL RELEASE MEASURES Use the same personal protective equipment as stated in section 8. Prevent spillage from entering drains and/or surface water. Wipe up spills with a cloth.
7. HANDLING AND STORAGE Handling: See section 8 for information about precautions for use and personal protective equipment. Storage: Do not expose to heat (e.g. sunlight). 8. EXPOSURE CONTROL/PERSONAL PROTECTION Engineering controls/general hygiene considerations: Use the product under well-ventilated conditions. Running water and eye wash equipment should be available. Wash hands before breaks, before using restroom facilities, and at the end of work. Respiratory protection: Not required. Skin protection: Plastic or rubber gloves recommended. Eye/face protection: Wear safety goggles if there is a risk of eye splash. Exposure guidelines: Substance Zinc oxide Oil mist mineral Exposure limit Remarks OSHA: 5 mg/m - fume ACGIH: TWA 2 mg/m, STEL 10 mg/m, respirabel OSHA: 5 mg/m ACGIH: TWA 5 mg/m, STEL 10 mg/m
TWA: time-weighted average STEL: short term exposure limit Control methods: Compliance with the stated occupational exposure limits may be checked by occupational hygiene measurements. 9. PHYSICAL AND CHEMICAL PROPERTIES Appearance: White grease Odor: Mild Odor threshold: N/AV Physical state: Paste pH: N/AV Melting point: N/AV Boiling point: N/AV Flash point: N/AV Evaporation: N/AV Flammability: N/AV 10. STABILITY AND REACTIVITY This product is stable when used in accordance with the suppliers directions. 11. TOXICOLOGICAL INFORMATION Immediate effects Inhalation: The product does not release hazardous vapors. Ingestion: Ingestion may cause discomfort. Skin contact: Degreases the skin. Long-term exposure may cause irritation and possible infection.
Upper/lower flammability or explosive limits: N/AV Vapor pressure: <0.1 mm Hg Vapor density: >0.5 Specific gravity: 0.89 Solubility: Insoluble in water Partition coefficient: n-octanol/water: N/AV Auto-ignition temperature: N/AV Decomposition temperature: N/AV
Eye contact: Temporary irritation. Long-term effects None known.
12. ECOLOGICAL INFORMATION Avoid discharge to drain or surface water. Ecotoxicity: Toxic to aquatic organisms, may cause long-term adverse effects in the aquatic environment. 13. DISPOSAL CONSIDERATIONS If this product as supplied becomes a waste, it does not meet the criteria of a hazardous waste as defined under the Resource Conservation and Recovery Act (RCRA) 40 CFR 261. Disposal should be in accordance with applicable regional, national and local laws and regulations. Local regulations may be more stringent than regional or national requirements. 14. TRANSPORT INFORMATION The product is not covered by the rules for transport of dangerous goods by road and sea according to DOT, ADR, IMGD. 15. REGULATORY INFORMATION US Federal TSCA: All ingredients are on the inventory or exempt from listing. CERCLA: None of the ingredients are on the inventory. SARA title III Rules. Section 302: None of the ingredients are on the inventory. Section 311/312 Hazard classes: Fire Hazard Reactive Hazard Release of Pressure Acute Health Hazard Chronic Health Hazard Section 313: None of the ingredients are on the inventory. State regulations Proposition 65 Chemicals known to cause cancer: None of the ingredients are listed Chemicals known to cause reproductive toxicity: None of the ingredients are listed EU-regulations Danger symbols: N R-phrases: Toxic to aquatic organisms, may cause long-term adverse effects in the aquatic environment. (R51/53) S-phrases: Avoid release to the environment. Refer to special instructions/safety data sheet. (S61)
16. OTHER INFORMATION This information is based on our present knowledge. However, this shall not constitute a guarantee for any specific product features and shall not establish a legally valid contractual relationship. NFPA ratings (scale 0 - 4) Health = 1 Flammability = 1 Reactivity = 0 HMIS III ratings (scale 0 4) Health hazard = 1 Flammability = 1 Physical hazard = 0 Sources used This MSDS has been prepared to comply with provisions of ANSI Z400.1-2004. The label text has been prepared to comply with the provisions of ANSI Z129.1-2006. ACGIH Exposure limits for Chemical Biological Substances, 2007. OSHA 29 CFR part 1910.1000, table Z1-Z3, Limits for Air Contaminants 2006. Key/Legend: N/AV: Not available or not applicable. This material datasheet was prepared from information provided by the supplier about the product at the time of preparation (e.g. data sheets and the like). Prepared on: 01-08-2007. Replaces:
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