In Australia, the Municipal Association of Victoria (MAV) has taken the initiative to create a funding vehicle for the local authorities within the state of Victoria. The new entity has been given the name Local Government Funding Vehicle (LGFV).
The Board of LGFV will consist of independents, council representatives and MAV representatives. Day to day activities is outsourced to subsidiaries of National Bank of Australia.
Moody’s has assigned a Aa2 rating to LGFV. This rating has been given although the participating councils are not liable to one another, but will instead severally guarantee their debt obligations. According to Moody’s “The very high credit quality of the participating councils and the mature and supportive institutional framework under which they operate support the ratings”. It continues: “In addition, councils in the State of Victoria enjoy significant revenue flexibility with full discretion on the setting of property taxes, fees and charges, which together account for almost 70% of their total revenues”. The rating is also underpinned by the fact that there has been no historical default by a Victorian Council.
30 councils in Victoria, out of 79, will participate in the inaugural bond issuance. In order to keep the rating for later bond issues, LGFV will apply a council eligibility criteria, “i.e. a new council must not have a negative impact on the rating of new or existing bonds”.
According to an article in the Australian Kanganews, “the potential attraction for councils is clear. Reports released by a number of councils refer to analysis conducted by Ernst & Young suggesting the LGFV will improve councils’ cost of funds by around 100 basis points.” Kanganews also writes that “a number of other states are exploring ways for local authorities to move at least some of their debt funding out of the bank sector”.