Long Term Community Plan 2012-2022 - Hurunui District Council

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www.hurunui.govt.nz Treasury Risk Management Policy The definition and recognition of interest rate, liquidity, funding, investment, counterparty credit, market, operational and legal risk of Council will be as detailed below and applies to both the Liability Management policy and Investment policy. Interest Rate Risk Risk Recognition Interest rate risk is the risk that funding costs (due to adverse movements in market interest rates) will materially exceed or fall short of projections included in the LTCCP and Annual Plan so as to adversely impact revenue projections, cost control and capital investment decisions/returns/and feasibilities. The primary objective of interest rate risk management is to reduce uncertainty relating to interest rate movements through fixing/hedging of funding costs. Approved Financial Instruments Dealing in interest rate products must be limited to financial instruments approved by the Council. Category Cash management and borrowing Investments Interest rate risk management Instrument Bank overdraft Committed cash advance and bank accepted bill facilities (short term and long term loan facilities) Uncommitted money market facilities Retail and wholesale Bond and Floating Rate Note (FRN) issuance Commercial paper (CP) Short term bank deposits Bank certificates of deposit (RCDs) Treasury bills NZ Government, Local Authority bonds and FRNs (secured/senior) LGFA borrower notes / CP / bills / bonds/ FRNs (floating rate notes) Local Authority promissory notes, Commercial paper (secured/senior) Forward rate agreements (“FRAs”) on: Bank bills Government bonds Interest rate swaps including: Forward start swaps (start date
Hurunui Community Long Term Plan 2012 - 2022 During the term of the option, only the sold side of the collar can be closed out (i.e. repurchased) otherwise, both sides must be closed simultaneously. The sold option leg of the collar structure must not have a strike rate “in-the-money”. • Purchased borrower swap options mature within 12 months. • Interest rate options with a maturity date beyond 12 months that have a strike rate (exercise rate) higher than 2.00% above the appropriate swap rate, cannot be counted as part of the fixed rate cover percentage calculation. • Forward start period on swaps and collar strategies to be no more than 24 months, and the underlying cap or swap starts within this period. Special and General Reserve Funds Given that Council may require funding for capital expenditure cash shortfalls over the remaining life of the existing special and general reserve funds, where such funds are deemed necessary they should be used for internal borrowing purposes when external borrowing is required. Accordingly Council maintains its funds in short term maturities emphasising counterparty credit worthiness and liquidity. The interest rate yield achieved on the funds therefore is a secondary objective. This will negate counterparty credit risk and any interest rate repricing risk that occurs when Council borrows at a higher rate compared to the investment rate achieved by Special / Reserve Funds. Liquid assets will not be required to be held against special funds or reserve funds unless such funds are held within a trust requiring such, instead, Council will manage these funds using internal borrowing facilities. Foreign Currency Hurunui has minor foreign exchange exposure through the occasional purchase of foreign exchange denominated services, plant and equipment. Generally, all significant commitments for foreign exchange are hedged using foreign exchange contracts, once expenditure is approved. Both spot and forward foreign exchange contracts can be used by Hurunui. Council shall not borrow or enter into incidental arrangements, within or outside New Zealand, in currency other than New Zealand currency. Liquidity Risk/Funding Risk Risk Recognition Cash flow deficits in various future periods based on long term financial forecasts are reliant on the maturity structure of cash, financial investments, loans and bank facilities. Liquidity risk management focuses on the ability to access committed funding at that future time to fund the gaps. Funding risk management centres on the ability to re-finance or raise new debt at a future time at the same or more favourable pricing (fees and borrowing margins) and maturity terms of existing loans and facilities. The management of Council’s funding risks is important as several risk factors can arise to cause an adverse movement in borrowing margins, term availability and general flexibility including: • Local Government risk is priced to a higher fee and margin level; • Council’s own credit standing or financial strength as a borrower deteriorates due to financial, regulatory or other reasons; • A large individual lender to Council experiences their own financial/exposure difficulties resulting in Council not being able to manage their debt portfolio as optimally as desired; • New Zealand investment community experiences a substantial “over supply” of Council investment assets; A key factor of funding risk management is to spread and control the risk to reduce the concentration of risk at one point in time so that if any of the above events occur, the overall borrowing cost is not unnecessarily increased and desired maturity profile compromised due to market conditions. Liquidity/Funding Risk Control Limits Alternative funding mechanisms such as leasing should be evaluated with financial analysis in conjunction with traditional on-balance sheet funding. The evaluation should take into consideration, ownership, redemption value and effective cost of funds. External, term loans and committed debt facilities together with liquid investments/cash equivalents must be maintained at an amount of 110% over existing external debt. The CEO has the discretionary authority to re-finance existing debt on more favourable terms. Such action is to be reported and ratified by the Council at the earliest opportunity. Council has the ability to pre-fund up to 12 months of forecast debt requirements including re-financings. The maturity profile of the total committed funding in respect to all external debt/loans and committed debt facilities, is to be controlled by the following system and apply when external 259
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Hurunui Community Long Term Plan 20
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About the Plan Introduction The Loc
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How Your Rates are Spent The Counci
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Table 1: Hurunui Community Long Ter
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Amuri-Hurunui Ward Profile Backgrou
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Hanmer Springs Ward Profile Backgro
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Council Activities Introduction In
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Water Supply Overview Water Supply
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Sewerage Overview Sewerage covers t
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Roading and Footpaths - Group Activ
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Annual Plan Year 1 Year 2 Year 3 Ye
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Funding Impact Statement (and Rates
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Development Contributions Policy In
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Page 207 and 208: Hurunui Community Long Term Plan 20
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Long Term Community Plan 2012-2022 - Hurunui District Council

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