The Kāpiti Coast District Council‘s Finance Manager says he rejects Deirdre Kent’s criticism of the KCDC interest rate ‘swaps.’
Warwick Read, Group Manager Finance, says: “The first statement by Deirdre Kent is totally incorrect. The “loss”, as at 30 June 2012, is an unrealised loss not an unrecoverable loss.
“Depending on the movement in interest rates, we either make an unrealised loss or an unrealised profit on our interest rate swaps. This reflects the change in the value of our swaps if we were to sell them, which we are not.
‘The critical issue‘
“The critical issue is that the average interest rates on Council debt as at 30 June 2012 was 5.35% and that savings of up to $700,000 per annum in debt servicing costs have been made through the management of interest rate swaps.”
This would not have been possible if Council had used fixed rate loans to secure its borrowings because of the cost involved in “breaking” fixed rate loans in a low interest rate environment.
Since 1998, Councils around New Zealand have been able to carefully plan their debt issues and make their own timing decisions about interest rates by using interest rate swaps. When new swaps are taken out, quotations are sought from the three main trading banks to ensure Council is achieving the best market price on the day.
Council uses independent treasury management advisors who also advise a number of large Corporates, Government Departments and Councils on treasury management issues. These independent advisors provide advice to Council and not the banks.
It needs to be remembered that the Local Government Act 2002 requires Councils to act as prudent financial managers and the Treasury Management policy framework that we operate within meets this objective through the forward managing of future interest rate risks arising from long term borrowing requirements.”