Clarence Valley Council (CVC) considered raising its debt ceiling from $131m to $197m at yesterday’s council meeting.
General manager Ashley Lindsay recommended “that council update its loan borrowing policy to reflect the increased sustainable debt level of $197M, as outlined in the EY [Ernst & Young] March 2021 debt review update”.
The EY report’s executive summary states that it was “engaged to review the sustainable debt funding capacity of CVC and Clarence Coast Holiday Parks (CCHPs)”.
The council operates the CCHPs as a separate business activity, with the objective that CCHPs remain financially independent.
The general manager has recommended funding the upgrades via CVC’s general fund, as a result of the expanded borrowing capacity recommended by EY.
The EY executive summary (the full report is confidential) considers the financial and fiscal risks associated with either: the CCHPs (as a stand-alone entity) taking on debt funding to underwrite the estimated $24m it will cost to upgrade the CCHPs; or, CVC underwriting the debt funding as part of its assessed capacity to sustainably borrow more money.
Historically, EY reviewed CVC’s debt position in August 2016, as well as its capacity to increase its debt.
“Our findings (amongst others) detailed a forecast sustainable debt level (as at June 2017) of $131m, providing debt funding headroom of $8m to its forecast sustainable debt level,” the summary states.
“In the time since the August 2016 report was completed, CVC has reduced its debt position through amortisation repayments to $104m, whilst improving its earnings through cumulative rate increases of approximately 25 per cent over the last three years, combined with $6m annual savings through a cost reduction program.”
In general terms, EY found that CVC’s current debt level of $104.1m is “compliant with the ‘conservative risk’ debt range”.
“Council therefore has additional borrowing headroom of $92.9m, which is greater than the proposed additional borrowing amount of $24m,” the summary states.
“We further note council never exceeds the ‘conservative risk’ debt range under its forecast figures, indicating it could undertake further borrowings if required (above the proposed additional $24m) while remaining below its sustainable debt level.”
On the other hand, EY found that the CCHPs only have “borrowing headroom of $10.9m”.
Borrowing $24m is rated as “‘speculative and a high credit risk’ … reflecting an increased probability of loan default”, the summary states.
It is up to councillors whether or not the recommended changes to CVC’s borrowing policy is placed on exhibition, Mr Lindsay said.
Note: this story was written to meet the paper’s editorial deadline, which was prior to the CVC meeting taking place.