DRAFT LTP book.indb - Hurunui District Council

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www.hurunui.govt.nzTreasury Risk Management PolicyThe defi nition and recognition of interest rate, liquidity, funding,investment, counterparty credit, market, operational andlegal risk of Council will be as detailed below and applies toboth the Liability Management policy and Investment policy.Interest Rate RiskRisk RecognitionInterest rate risk is the risk that funding costs (due to adversemovements in market interest rates) will materially exceed orfall short of projections included in the LTCCP and Annual Planso as to adversely impact revenue projections, cost control andcapital investment decisions/returns/and feasibilities.The primary objective of interest rate risk management is toreduce uncertainty relating to interest rate movements throughfixing/hedging of funding costs.Approved Financial InstrumentsDealing in interest rate products must be limited to fi nancialinstruments approved by the Council.CategoryCash managementandborrowingInvestmentsInterest rate riskmanagementInstrumentBank overdraftCommitted cash advance and bank accepted bill facilities(short term and long term loan facilities)Uncommitted money market facilitiesRetail and wholesale Bond and Floating Rate Note (FRN)issuanceCommercial paper (CP)Short term bank depositsBank certifi cates of deposit (RCDs)Treasury billsNZ Government, Local Authority bonds and FRNs(secured/senior)LGFA borrower notes / CP / bills / bonds/ FRNs (fl oatingrate notes)Local Authority promissory notes, Commercial paper(secured/senior)Forward rate agreements (“FRAs”) on:Bank billsGovernment bondsInterest rate swaps including:Forward start swaps (start date
Draft Hurunui Community Long Term Plan 2012 - 2022During the term of the option, only the sold side of thecollar can be closed out (i.e. repurchased) otherwise,both sides must be closed simultaneously. The soldoption leg of the collar structure must not have a strikerate “in-the-money”.• Purchased borrower swap options mature within12 months.• Interest rate options with a maturity date beyond 12months that have a strike rate (exercise rate) higherthan 2.00% above the appropriate swap rate, cannotbe counted as part of the fi xed rate cover percentagecalculation.• Forward start period on swaps and collar strategies tobe no more than 24 months, and the underlying cap orswap starts within this period.Special and General Reserve FundsGiven that Council may require funding for capital expenditurecash shortfalls over the remaining life of the existing special andgeneral reserve funds, where such funds are deemed necessarythey should be used for internal borrowing purposes whenexternal borrowing is required. Accordingly Council maintainsits funds in short term maturities emphasising counterpartycredit worthiness and liquidity. The interest rate yield achievedon the funds therefore is a secondary objective.This will negate counterparty credit risk and any interest raterepricing risk that occurs when Council borrows at a higherrate compared to the investment rate achieved by Special /Reserve Funds.Liquid assets will not be required to be held against specialfunds or reserve funds unless such funds are held within a trustrequiring such, instead, Council will manage these funds usinginternal borrowing facilities.Foreign CurrencyHurunui has minor foreign exchange exposure through theoccasional purchase of foreign exchange denominated services,plant and equipment. Generally, all signifi cant commitments forforeign exchange are hedged using foreign exchange contracts,once expenditure is approved. Both spot and forward foreignexchange contracts can be used by Hurunui. Council shall notborrow or enter into incidental arrangements, within or outsideNew Zealand, in currency other than New Zealand currency.Liquidity Risk/Funding RiskRisk RecognitionCash flow defi cits in various future periods based on longterm fi nancial forecasts are reliant on the maturity structureof cash, fi nancial investments, loans and bank facilities. Liquidityrisk management focuses on the ability to access committedfunding at that future time to fund the gaps. Funding riskmanagement centres on the ability to re-fi nance or raise newdebt at a future time at the same or more favourable pricing(fees and borrowing margins) and maturity terms of existingloans and facilities.The management of Council’s funding risks is important asseveral risk factors can arise to cause an adverse movementin borrowing margins, term availability and general fl exibilityincluding:• Local Government risk is priced to a higher fee andmargin level;• Council’s own credit standing or financialstrength as a borrower deteriorates due to fi nancial,regulatory or other reasons;• A large individual lender to Council experiences theirown fi nancial/exposure diffi culties resulting in Councilnot being able to manage their debt portfolio asoptimally as desired;• New Zealand investment community experiences asubstantial “over supply” of Council investment assets;A key factor of funding risk management is to spread andcontrol the risk to reduce the concentration of risk at onepoint in time so that if any of the above events occur, the overallborrowing cost is not unnecessarily increased and desiredmaturity profi le compromised due to market conditions.Liquidity/Funding Risk Control LimitsAlternative funding mechanisms such as leasing should beevaluated with fi nancial analysis in conjunction with traditionalon-balance sheet funding. The evaluation should take intoconsideration, ownership, redemption value and effective costof funds.External, term loans and committed debt facilities together withliquid investments/cash equivalents must be maintained at anamount of 110% over existing external debt.The CEO has the discretionary authority to re-fi nance existingdebt on more favourable terms. Such action is to be reportedand ratifi ed by the Council at the earliest opportunity.Council has the ability to pre-fund up to 12 months of forecastdebt requirements including re-fi nancings.The maturity profi le of the total committed funding in respectto all external debt/loans and committed debt facilities, is tobe controlled by the following system and apply when external265
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DRAFT LTP book.indb - Hurunui District Council

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