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Friday
Apr122013

TCDC's 'Financial Derivatives'

You would have thought that Council would had avoided some of the worst excesses of the most recent crash, blamed to a large extent on Wall Street derivative market abuses.

Not so - TCDC was convinced to adopt a hedging strategy in 2009 that continues like a sword of Damocles over its finances. A percentage of its borrowing is in effect 'insured' against wild fluctuations in interest rates – much like ‘fixing’ or ‘floating’ mortgages. It sounded good at the time because of the likelihood of a substantial hike in the Reserve Bank OCR, but that has done nothing but slide or stabilize ever since. There is nothing to indicate any immediate change in this situation, so ‘paper’ losses continue, or do they?

The upshot is that these  derivatives must be valued periodically – in our case six-monthly in accord with Council’s Liability Management Policy, and the resulting figure incorporated into the Financial Statements. Variations can vary by millions over time, and can have a substantial effect on the value of Non-current assets over time, but generally no-one takes much notice - and the comments on the accounts seldom draw attention to the vagaries of the market and the effect on the accounts – because I suspect, it is seen as too complicated for the average punter to understand - not because of any ulterior motive. Regardless, it does not impact rates, until finally 'settled'. 

It is moot whether in the light of what has happened since whether Council would have taken the advice provided by its debt advisors at the time (Asia Pacific Risk Management), but that is being wise after the event. Council was sufficiently impressed at the time, and committed to the arrangement. It would have been better to take the short-term pain at the time, but it is  futile criticising the decision now. This does not gainsay the need to watch the progress of the derivatives at each point in the cycle.

The current liability projected in the Annual Plan (to 30 June 2013) as $96k - revised to zero on 30 October (presumably due to the absence of a valuation at that time). At the same time, the TYP predicted a liability of $151K as at 30 June 2014 - now forecasted in the Annual Plan at $934k. There appears no explanation for the substantial change, and this is unsatisfactory - Council is at risk at all times in regard to these derivatives, and the valuations can have a substantial effect of the ultimate results each year.

Ratepayers deserve at the very least to be kept fully informed at all times in regard to this risk, and the fluctuations explanation.  

 

 


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