Jenee Tibshraeny: NZ Herald Wellington business editor on S&P Global Ratings downgrading the credit ratings of 18 councils

18 councils and three council-controlled organisations have recently had their credit ratings downgraded by S&P Global Ratings.

The credit rating agency has expressed concern that councils aren't receiving enough revenue to cover rising costs, including investment in infrastructure.  

NZ Herald Wellington business editor Jenee Tibshraeny explains further.

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Episode Transcript

Speaker 1 (00:00):
Eighteen councils and three council controlled organizations have just had
their credit ratings downgraded by S and P Global Ratings.
The credit rating agency worried councils aren't receiving enough revenue
to cover rising costs. A trainee is The Herald's Wellington
Business editortions with us now good evening evening rang to
know this is not good news. What's changed? Why the downgrade? Now?

Speaker 2 (00:23):
Yeah it is. It is bad news. Basically, council's debt
is really high. That the pressures on council to invest
in infrastructure after years of councils underinvesting, is really catching
up with them. The issue is that their ratings base
isn't necessarily as increasing as much as the cost Now.

(00:45):
Of course, you know, different councils are increasing rates by
varying amounts, and here in Wellington the rates rises are
pretty bad. Councils are under pressure to not increase rates
too much, but those costs are are really coming to
any head. So that is something that that the ratings
agency is weary of. It is also worried about the

(01:08):
fact the government is not actually giving councils as much
money as before. The availability of grants from the Crown
has decreased and there's also a bit of uncertainty around
government policy when it comes to local government. So that's
another problem that s and p raised. Now, credit rating
agencies don't just come out of the blue and downgrade ratings.

(01:31):
It's quite a big deal. SMP has been warning of
this for at least the past year.

Speaker 1 (01:36):
Yeah, and that some have been downgraded in the past
as well, haven't they Which councils haven't had their ratings changed.

Speaker 2 (01:44):
So Auckland Council that is a big one and that's
a positive. Also Bay of Plenty Regional Council, Western Bay
of Plenty District Council. Those are just some of them.
The problem now when these credit raisings are downgraded is
that it costs counsels more to borrow money. Now that

(02:05):
is an issue given the amount that council's need to
borrow for infrastructure here in Wellington, the pipes, the water.
That's all an issue. I talked earlier today to the
head of the Local Government Funding Agency. That's an agency
that's set up that borrows money, issues debt to markets,
It borrows money and then it lends money to councils

(02:27):
and Mark Butcher, the head of that agency. He said
that when councils credit ratings are downgraded and notch, that
adds five basis points to their to their borrowing costs.
So if you're if you're Wellington Council and you currently
borrow for I'm just making the number up, but you
borrow for five percent from the Local Government Funding Agency.

(02:48):
If your credit rating is downgraded, that that interest rate
then goes up to five point zero five percent. So
so that is that is the impact. You know, credit
rating goes down, cost to councils and to rate payers
goes up.

Speaker 1 (03:04):
And is Wellington one of the ones that's been downgraded?

Speaker 2 (03:07):
Yeah, yeah, Wellington. Wellington has been downgraded now out then.

Speaker 1 (03:11):
And they haven't applied and they didn't apply for their
city deal on times because that presumably would help with financing.

Speaker 2 (03:17):
Right, Look, I'm not too sure. The way that this
is set up is actually quite good with the Local
Government Funding Agency, So rather than having councils go out
there and try to get money themselves, they do it
through the LGFA. Now SMP also gives the LGFA, the

(03:38):
Local Government Funding Agency, a credit rating and just yesterday
it affirmed that rating, So the lgfa's credit rating has
stayed the same. That sort of softens the impact of
these councils having their ratings downgraded because it means that
the local government funding agency can keep borrowing money from

(03:58):
you know, around New Zealand around the world at the
same sort of rate that it currently does, and then
it on lends that money to counsels for a bit
more So that does create a bit of a buffer,
and it means that at least the institution that is
organizing the borrowing of money and then on lending it
that is in good nick and s and P is

(04:20):
happy with the governance of that the way that's set up,
the amount of capital it has, its diversification, all that
sort of thing. So there is a bit of a
silver lining in this scenario.

Speaker 1 (04:32):
Fascinating stuff to I thank you very much for running
us through it. To agypt training Inted Herald's Wellington Business editor.
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