Port Otago wants its shareholder to borrow $100million on its behalf to increase its debt facilities without the need of a commercial bank.
The port has lending facilities with ANZ of $110million with the option to extend that to $150million.
Port Otago has asked the Otago Regional Council (ORC) to borrow up to $100million on a 10-year fixed term deal from the Local Government Funding Agency (LGFA) — which provides funding to local authorities — so it does not have to do that.
The matter was discussed at a recent council meeting by councillors and the ORC’s general manager corporate services Nick Donnelly.
The port company was unable to join the LGFA, but the council could borrow from it and on-lend to Port Otago via a shareholder loan agreement.
That was "vividly demonstrated" by the loss of the port’s cruise income over the past two years.
The lower interest rates cost would reduce Port Otago’s annual interest costs by $500,000 to $1million.
That would provide an ongoing benefit to the port, helping it buffer head winds as they would occurred in the future, he said.
The LGFA funding would be used to pay down Port Otago’s debt and provide liquidity for its future investment programmes.
It would still keep its arrangements with ANZ, Mr Rea said.
ORC chairman Andrew Noone said the risk to the regional council was minimal.
The port was "prudently geared" with a strong balance sheet and current equity ratio of83%.
"Essentially, it’s a similar arrangement to a parent — in this case, the ORC — using its better credit rating or asset base to access a more favourable loan for their children — in this case, Port Otago — to buy a property," Cr Noone said.
Port Otago would be meeting all the annual costs of the ORC obtaining an external credit rating. That meant council would be able to draw down debt from the LGFA for its own use without paying any credit rating fees.
During last week’s council meeting, councillors spoke in support of the deal saying the port’s "comfortable" finance position gave them confidence.
Mr Donnelly said port had multiple projects planned in the future, such as its head office and further work at its Hamilton property development.
In its recent interim result to December 31 2021, the port’s total borrowings, current and non-current, was about $93.7million.
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For very good and proper reasons the Local Government Act has this to say about Councils and CCTO's (council controlled trading organisations) that they own:
"62 Prohibition on guarantees, etc
A local authority must not give any guarantee, indemnity, or security in respect of the performance of any obligation by a council-controlled trading organisation."
Pretty clear isn't it. Stealing money from the ratepayer would be too easy if this was legal....
Imagine the scenes in courtrooms across the land...."Well M'Lud, We had absolutely no idea when we councillors voted for the Council (ie the ratepayer) to guarantee the debts of Councillor Dodgy's proposed Council owned building development company that it would shortly become insolvent - due to poor conctracting practice (with Councillor Dodgy's private contracting company) blah, blah blah.....".
A council borrowing specific and dedicated sums of money from a third party (in this case the LGFA) directly on behalf of a CCTO that it owns, and then handing that money over in full to said organisation is the exact equivalent of directly guaranteeing its debts. It appears to be unlawful under Section 62 of the Act.