As part of a policy initiative, TCorp, the financing arm of the NSW State Government is offering low interest loans to NSW local councils to help them fund infrastructure backlogs. So far TCorp has lent $647 million reducing the local government infrastructure backlog from $7.5 billion in 2010-11 to $3.6 billion in 2017-18. Forty three NSW councils have accessed the scheme as at the end of July 2019.
However, one restriction TCorp places on councils gaining access to these facilities is the credit quality of each council’s investment portfolio. We understand from TCorp the approach they have adopted is focused on councils achieving a balanced investment portfolio weighted towards higher rated investments, in order to conservatively protect rate payers’ long term capital.
In practice in order to participate in the TCorp loan program councils need to restrict the number of investments rated BBB+ and below to under 30% of their total portfolio with no more than 5% in the BBB- or unrated category with these lower or non-rated investments being restricted to local ADI’s and tenors less than 12 months.
The restrictions are broadly in line with Amicus’ own views of how a prudent investment portfolio should be constructed (please contact Amicus if you would like a copy of Amicus “Recommendations Portfolio” constructed from following Amicus’ monthly recommendations to its clients over the last 5 years). Amicus’ opinion is that it would be hard for either a council or its advisor to defend a decision to invest in an unrated and unlisted ADI if that ADI were to fail unless the amount invested is below the government guarantee of $250K or the investment was made to support a local institution and so had community as well as financial considerations. This is simply because of the limited basis on which to make an investment recommendation if there is no independent assessment from a credit ratings agency nor the continuous disclosure required by a stock exchange listing. A huge reliance in any risk assessment is therefore placed on APRA’s effective supervision.
The two practical conclusions Amicus draws from the TCorp Low Interest Loans initiative and its associated investment portfolio restrictions are:
- For councils who need access to funds to improve infrastructure within their communities, but do not have an investment portfolio that meets the TCorp lending criteria, then there is a decision to be made as to whether the council modifies its investment portfolio to meet the criteria or goes without the loan. In most cases, Amicus is likely to be of the view that it would be worth altering the investment portfolio to meet the TCorp criteria (and this is certainly an area where Amicus can help).
- Given TCorp is the financing arm of the NSW State Government (who is the ultimate regulator of NSW councils through the setting of the Ministerial Investment Order which every council must follow), Amicus believes it would be reasonable to assume TCorp’s views are unlikely to be at odds with those of the State Government as to what constitutes a prudent investment portfolio. This is a rationale any council whose portfolio does not meet the TCorp lending criteria should also consider separately from any decision to borrow from TCorp.
For conservative investors outside NSW local government, the TCorp lending policies are also of interest as they debatably provide insight as to what a large, well-resourced and experienced financial organisation (with no commercial conflicts of interest) considers conforming to the Prudent Person Guidelines under the Trustees Act of 1925 actually means in practice.