Ratepayers may get new chance to buy bonds

Doug Armstrong says the offer would allow ratepayers to safely invest in their city. Photo / Brett Phibbs

A pool of money could be set aside for Auckland City ratepayers to invest in city projects after a stampede by wholesale investors in a $150 million retail bond offer by the council.

The bond offer was heavily oversubscribed when it opened last Monday, leaving investors facing a scaled-back investment when the offer closes on March 20.

Finance committee chairman Doug Armstrong yesterday said he would like to see a pool of money set aside for ratepayers in future bond issues. It would give ratepayers an opportunity to safely invest in their city, he said.

The council has an AA rating from the international credit agency Standard & Poors.

The $150 million bond offer, the largest by a council, will be used to refinance debt and cover new capital works such as the $113 million Auckland Art Gallery upgrade. It is for five years at 6 per cent interest.

The council is cranking up its debt, from $463 million to $733 million in the 2009-2010 financial year, to help deliver a $532 million capital works programme. It also plans to hold the average rates increase to 2 per cent.

The council is going down the retail bond path because of uncertainty and volatility in financial markets and because of a law change this year encouraging councils to return to the retail debt market.

The Tauranga City Council raised $50 million from a fully subscribed five-year retail bond issue at an interest rate of 7.05 per cent last November.

Investors are flocking to bond issues in the economic turmoil. Auckland stockbroker and financial adviser Brent Sheather, writing in the Weekend Herald, said while risk was foremost in people's minds, everyone was buying bonds.

"The worry, of course, with long bonds is that inflation will eventually kick up, interest rates will rise and bond prices fall. Or will deflation set in and short-term interest rates fall further, making bonds more valuable? Who knows?"