Law change makes it easier for local authorities to re-enter the public debt-securities market

A recent amendment to the Securities Act 1978 will simplify the disclosure requirements and make it easier for local authorities to issue debt securities to the public. In this article, partner Glenn Joblin outlines the scope of the amendment.

Introduction

The Securities (Local Authority Exemption) Amendment Act 2008 provides local authorities with an exemption from the full disclosure requirements of that Act when issuing debt securities to the public. Local authorities will be required to issue an investment statement, but not a registered prospectus, when issuing debt securities to the public.

The exemption will mean that local authorities will be subject to the same disclosure requirements that apply to similar existing exemptions for the Crown, the National Provident Fund Board, the Reserve Bank and Housing New Zealand Corporation.

Purpose of amendment

A similar exemption for local authorities was repealed in 1996 (with effect from 1998). As a result, local authorities were subject to the same disclosure obligations as companies and other corporate entities in relation to a public issue of debt securities.

The lack of debt issues by local authorities over the past 10 years indicates that the disclosure obligations under the Securities Act were a barrier to issuing debt securities, particularly for smaller local authorities. Local authorities were already required to produce detailed information on their activities and plans under the Local Government Act and they saw disclosure requirements for a prospectus as creating a substantial degree of duplication and unnecessarily imposing additional compliance costs.

In addition, it was necessary to have all councillors of a local authority sign a prospectus in order to comply with the Securities Act 1978. This meant that a single dissenting councillor could prevent an issue of debt securities by refusing to sign the prospectus. The same issue does not apply to an investment statement as it is not required to be signed by directors of the issuer.

The relaxation of the disclosure requirements applicable to local authorities comes at a time when they are facing additional demands for infrastructure funding. The Government has stated that local authority long-term plans show that local authorities are undertaking some $30.8 billion in capital works (network or community infrastructure) over the next 10 years, and 50 per cent of this amount could be required by 2009. The Securities (Local Authority Exemption) Amendment Act is intended to assist local authorities to fund these works.

Scope of exemption

Local authorities will no longer be required to issue a registered prospectus of an issue of debt securities. This will significantly simplify the disclosure requirements for local authorities wishing to issue debt securities to the public and while they will still need to issue an investment statement and appoint a trustee to act on behalf of security holders, an investment statement can be a relatively brief document.

The investment statement relating to the debt securities must refer to the most recent audited financial statements, and audited consolidated financial statements, for the local authority. Those financial statements will be treated as forming part of the investment statements but there is no need to include any specific financial information in an investment statement.

A local authority which issues debt securities will be borrowing under the Local Government Act. This allows local authorities to charge a rate or rate revenue as security for the issue of debt securities.

It will be interesting to see to what extent local authorities now access the public debt securities market to fund capital projects. The recent successful $200 million perpetual preference share issue by The Bay of Plenty Regional Council, through its subsidiary company Quayside Holdings, indicates that there is likely to be strong demand for debt securities issued by local authorities.

Enquiries and information

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