Local government bonds attract huge interest

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Investors have lapped up the first bond issue by the new Local Government Funding Agency, placing more than $1 billion of bids for the $300 million offer.

Thursday, February 16th 2012, 6:30AM 1 Comment

by Niko Kloeten

Overall the issue attracted bids of $1.32 billion, more than four times the amount being sold.

Both sets of bonds received strong interest, with $216 million being bidded for $50 million of bonds maturing in 2015 and $1.104 billion bidded on $250 million of bonds maturing in 2017.

The coupon rate for both bonds was 6.00%, with successful bids for the 2015 bonds having a range of 3.65% to 3.69% and a weighted average yield of 3.67%, while successful bids for the 2017 bonds had a range of 4.33% to 4.66% and a weighted average yield of 4.61%.

In its report on the inaugural bond LGFA bond issue, ANZ said the overall bid cover ratio of 4.4 (4.3 for 2015 bonds and 4.4 for 2017 bonds) was well above that achieved recently in New Zealand government bond issues, which have attracted an average bid cover ratio of 2.9 since 2009.

"Broadly speaking, we believe the DMO [Debt Management Office, which managed the issue] has done well to have issued bonds with a maximum clearing margins of around 80 and 118 for 2015 and 2017 bonds respectively.

"At these margins, the LGFA has not come close to achieving its stated aim (from its Statement of Intent) of an average cost of funds of 50 basis points above NZGS. However, given current market conditions, we consider today's tender to have been a success.

"Although success on the part of the issuer may perhaps imply the opposite for investors, there is a happy middle ground, and we think today's margins are consistent with that.

"The fact that bid cover was as high as it was is very encouraging, as it shows the issuer is on peoples' radars."

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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