OREANDA-NEWS. November 17, 2015. Fitch Ratings has affirmed New Zealand Local Government Funding Agency Limited's (LGFA) Long-Term Local-Currency Issuer Default Rating (IDR) at 'AA+' and Long-Term Foreign-Currency IDR at 'AA'. Fitch has also affirmed its Short-Term Foreign- and Local-Currency IDRs at 'F1+'. The Outlook on the long-term ratings is Positive.

At the same time, Fitch has affirmed the senior unsecured local-currency bonds at 'AA+', and the short-term domestic debt programme at 'F1+'.

The affirmation of LGFA's ratings reflects its strong links to the sovereign, which is a shareholder in the company, liquidity provider and derivative counterparty. It also reflects the robust underlying credit profiles and asset quality of the company's other local council shareholders and borrowers, who provide support through a joint and several liability guarantee (JSLG). Fitch classifies LGFA as a credit-linked Public Sector Entity and equalises the ratings of LGFA with those of the sovereign (Long-Term Foreign-Currency IDR: AA/Positive; Long-Term Local-Currency IDR: AA+/Positive).

KEY RATING DRIVERS

We believe the sovereign's strong links to LGFA are demonstrated through its 20% shareholding, and NZD1bn liquidity facility (currently set at NZD400m) and derivative services provided by the New Zealand Debt Management Office (DMO).

LGFA's loan pool is concentrated among the larger New Zealand councils, in particular Auckland Council, which accounted for around 35% of the total exposure at end-August 2015. However, the credit quality of New Zealand's local governments is strong, supported by a solid institutional framework, limited levels of responsibilities and strong operating margins.

All principal shareholders and borrowers with more than NZD20m in loans are required to sign the JSLG, which is on demand and can be called without a board or court order. Under this guarantee a security trustee can, on behalf of LGFA's bondholders among others, call on guarantors directly following a payment default by LGFA.

The company as a financing vehicle for councils continues to grow in importance. Total loans to the local authority sector increased by 34% to NZD5bn at the financial year-end on 30 June 2015 (FYE15). Attractive pricing and longer debt maturities have been complemented by greater flexibility following the introduction of bespoke lending in FY15 and the development of short-term lending options in FY16.

LGFA can raise debt in local and foreign currency in both domestic and offshore markets. The entity's asset maturity profile is well matched to its debt maturity profile and liquidity needs have been limited to prefunding requirements. Liquidity is sound due to the facility provided by the DMO, but on-balance sheet liquidity is modest with cash and fixed-income securities totalling NZD108m at FYE15. However, we expect liquid assets to increase following the introduction of bespoke and short-term lending.

LGFA benefits from a diversified investor base and during FY15, offshore investors doubled their holdings of LGFA bonds. At end-April 2015, offshore investors held around 26% of bonds on issue.

RATING SENSITIVITIES

The ratings of LGFA are credit-linked to that of the New Zealand sovereign; a positive or negative rating action would stem from a similar move on the sovereign's ratings.

Significant changes to LGFA's legal status or strategic importance could result in the entity no longer being credit-linked to the sovereign and downward pressure on the ratings.