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City of Johannesburg municipal bond issue. Presentation to IADF Conference 1 October 2004. Overview of presentation. The City of Johannesburg Institutional & legal framework for municipal debt Process and framework adopted for the bond issues Results of the bond issues Lessons learnt.
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City of Johannesburgmunicipal bond issue Presentation to IADF Conference1 October 2004
Overview of presentation • The City of Johannesburg • Institutional & legal framework for municipal debt • Process and framework adopted for the bond issues • Results of the bond issues • Lessons learnt
Africa, South Africa & Johannesburg City of Johannesburg
Towards the City of Johannesburg (11 administrations) 1995 elections (5 Councils) 2000 elections
Basic parameters • Johannesburg accounts for 16% of national economic product • The population is approximately 3.2 million people • Over 1 million households • Around 100 000 businesses • The population is growing at about 4% per year • The City of Johannesburg … • employs 25 000 staff across 14 service delivery entities • has consolidated budgets of: • Operating ZAR 11,936 m (approx USD 1,840 m) • Capital ZAR 1,978 m (approx USD 300 m) • Total ZAR 13,908 m (approx USD 2,140 m) * Conversion rate – 1 USD = 6.5 ZAR
Credit rating upgrade (Local currency rating) 1999: Fitch BBB+ F2+ 2003: Fitch A- F2+ 2003: CA Ratings A A2+
Continuing financial challenges • To increase revenue collection rates • To increase capital expenditure • To fund further increases in service delivery • To achieve a clean audit opinion • To obtain further credit rating improvements
Overview of presentation • The City of Johannesburg • Institutional & legal framework for municipal debt • Process and framework adopted for the bond issues • Results of the bond issues • Lessons learnt
Legal framework • Local government legislation: • Constitution of RSA (1996) • Municipal Structures Act (1998) • Municipal Systems Act (2000) • Municipal Finance Management Act (2003) • Property Rating Act (2004) • Financial market legislation: • Financial Markets Control Act • Financial Services Board Act • Strong legal framework for investors: • Depth of legal system, and enforceability of agreements • Comprehensivelyregulated financial markets • Municipalities required to comply strictly to legalframework
Institutional & policy framework • Regulators • National Treasury – fiscal policy, intergovernmental fiscal relations, etc • South African Reserve Bank - monetary policy • Financial Services Board - regulates the non-banking financial sector • Lenders • Commercial banks • Development Bank of SA • Infrastructure Finance Corporation • Other • Bond Exchange of South Africa – Facilitation of bond trading • Debt Issuers Association – private association of issuers • Policy parameters for municipal borrowing • No government guarantee • No tax advantages in holding municipal debt • Municipalities may not borrow overseas
Outstanding listed bonds in SA Total: R527.6 billion ($81.2 billion) (Source: BESA)
Overview of presentation • The City of Johannesburg • Institutional & legal framework for municipal debt • Process and framework adopted for the bond issues • Results of the bond issues • Lessons learnt
Reasons for the municipal bond issue • To diversify funding sources • Only seven banks – running into `single obligor’ limits • To reduce the average cost of borrowing • To extend the funding maturity profile • Improve the matching of funding maturity to asset life • To release escrow accounts • To initiate the municipal bond market
Process adopted • 2001 - Idea first considered: But concluded we were not yet ready • 2003 - Idea revisited • Feasibility study & analysis of existing debt profile • Visit to Mexican municipal issuers • Appointment of Bond Advisor & Lead Arrangers • Road shows • International – to find an international guarrantor • Local – to introduce `the credit’ to the investors • 2004 – Full speed ahead • Local road shows – to sell the offering • Rating agencies • Legal work regarding guarrantees etc • Book-building
Basic framework adopted • Johannesburg would issue two bonds • ZAR 1 billion, 6 years, unenhanced (COJ01) • ZAR 1 billion, 12 years, enhanced (COJ02) • 40% guarrantee by IFC and DBSA • No intercept, administration trust or other special vehicle, but: • Comfort to investors and guarantors • Access to information - teach the market about municipal credit (a new asset class) • Transparency & communications • Trustee to act on behalf of investors & guarrantors • Separate bank account (in CoJ’s name) for settlement amounts
Basic framework adopted (cont.) • Negative pledge • CoJ must retain at least R8 billion of un-encumbered assets • Cash-flow provisions • 6 months rolling reserve account • Covenants • Interest to opex ratios to be maintained below 7% • Trading and settlement • BESA has listed the bonds • Clearing & settlement as per BESA rules • Comprehensive events of default (ten conditions)
1000 Outstanding Principal Guarantee amount of ZAR 400 mm declines proportionately with bond years 9.5-12 MM Rand Payment structure (COJ02) (12 Year Amortizing Bond with assumed 13.5% coupon and 40% Guarantee) 800 600 400 Debt Service 200 Years …8 9 1 2 3… 10 11 12
Overview of presentation • The City of Johannesburg • Institutional & legal framework for municipal debt • Process and framework adopted for the bond issues • Results of the bond issues • Lessons learnt
Issue results • Successful issue by first-time issuer • Inaugurated the municipal bond market • First partially guarranteed bond in SA
Strategic objectives achieved • Diversified Johannesburg’s funding sources • 15 new investors (mainly private sector institutions) • including some very risk-averse investors • positioned ourselves for higher capex going forward • `New constituency’ – enhanced credit discipline • Reduced the average cost of borrowing • interest savings of approx R20 m per annum • Restructured the debt maturity profile • profile shifted outwards • Release of escrow investments that were linked to loans
COJ01: spread above benchmark (Source: BESA)
Overview of presentation • The City of Johannesburg • Institutional & legal framework for municipal debt • Process and framework adopted for the bond issues • Results of the bond issues • Lessons learnt
Pre-conditions? • Sound legal framework • Sound national financial policies (fiscal, monetary, etc) • `Reasonable’ credit rating • Some investors rely on rating reports • Some have their own assessment capacity • Credit enhancement may be necessary • Ability to manage the bond issue - internal treasury capacity • Good strategy & planning • long-term economic development strategy • long-term capital development plan and funding plan • Sound leadership & management • Politicians & officials • Know your problems, have a plan to deal with them, and show some progress. • Clean audit report?
Keep it simple! • Market accepts that the municipalities have challenges • They will lend, but will price the risk • New issuers (and issuers inaugurating the market) can expect to pay a premium • Transparency breeds confidence - spreads tighten • Foreign guarantors • Sometimes seek to impose different standards than apply locally (environment, legal, pricing) • May not thoroughly understand the local environment • There is no substitute for having your own capacity • Be alert! Lessons learnt by CoJ
Johannesburg home page: http://www.joburg.org.za Thank you …