310 likes | 573 Views
Accessing the Capital/Debt Market Why?. Urban infrastructure requires long- term funds at a reasonable costLack of long-term funds is main constraintCapital/debt markets are emerging as perennial and sustainable source of funds for ULGsCapital market tap household savings, which can provide lon
E N D
1. Accessing the Capital Market Why Capital/Debt Market?
Market Access by ULGs
Municipal Bond Market
Municipal Credit Rating
The Road Ahead
2. Accessing the Capital/Debt Market – Why? Urban infrastructure requires long-term funds at a reasonable cost
Lack of long-term funds is main constraint
Capital/debt markets are emerging as perennial and sustainable source of funds for ULGs
Capital market tap household savings, which can provide long-term funds
Needs only a fiscal instrument appropriate in terms of risk, liquidity and returns
3. Accessing the Capital/Debt Market – Introduction (continued) Capital markets in developing countries are under-developed or play a minor role because of absence of appropriate public policy on infrastructure financing
Entails paradigm shift in municipal fiscal management practices
Entails innovative debt-servicing, debt management and asset management practices
Also needs an innovative risk mitigation mechanism
Facilitates and sustains PPP initiatives
4. Development of Debt Market Govt. securities dominated the debt market from the 1960s to the 1990s
Three components of debt market
Government securities
Public sector undertaking securities
Corporate sector Securities
Several new securities emerging
Deep discount bonds, securitised debt, public sector infrastructure bonds, government index bonds, corporate floating rate bonds, municipal bonds and institutional tax-free bonds
Emergence of fourth segment - Municipal Bond Market
5. Development of Debt Market Strategies based on U S Model
6. Municipal Debt Financing Concept still nebulous in developing countries
Market borrowings can accentuate an ULG’s fiscal stress – one needs to be careful
Municipal debt financing depends on ULG’s
Financial health
Fiscal and financial autonomy
Debt-absorption capacity
Debt management and monitoring ability
But why and how municipal bodies should resort to debt financing
7. Market access by ULGs Municipal infrastructure requires long-term funds that an active debt market alone can provide
ULGs in developing countries increasingly accessing the debt market
Direct access by ULG
Through intermediary (pooled finance)
By project entities such as special purpose vehicles
8. Market Access by ULGs Supportive Systems/Arrangements Credit Rating System
Credit Enhancing Mechanisms
Debt service reserve funds
Over-collateralisation of cash flows
Flow of funds structure
Bond insurance or financial guarantees from private insurance companies
Letters of credit from banks
Tax-free status to municipal bonds
9. Market Access by ULGs Some Questions Public debt management by ULGs raises several questions:
What factors should govern local government bond issues or market borrowings?
How do we integrate them into the active debt market?
What should be their risk weights?
How should debt liability issues in the event of default be addressed?
Should such bonds be restricted to urban local bodies?
10. Market Access by ULGs Debt Servicing Capacity Assessment Basis or foundation of market access
Two ways to assess
Quick self-assessment by ULG
Detailed assessment by credit rating agency
Three methods for assessing debt-servicing capacity
Debt ceiling approach
Credit rating approach
Loan appraisal approach
Cash flow approach
Balance sheet approach
11. Quick self-assessment of debt carrying (servicing) capacity Determine current account surplus (CAS)
Project potential CAS in future
Estimate relative increase in CAS
Project population growth
Estimate total CAS by multiplying incremental CAS with projected population
Determine level of direct cost recovery
Multiply CAS by cost recovery multiplier
Use NPV to equalise amortised loan repayment and debt servicing capacity
12. Market Access by ULGs – Exercise 1 Q1. Which debt instruments can be applied to access the capital market in your context.
Q2. What steps need to be taken to promote these instruments.
Q3. Assess a town’s debt-carrying capacity as per Illustration 2 and suggest an action plan for the same.
13. Municipal Bond Market Municipal bonds emerging as a popular instrument to access the capital market
Developing countries have introduced them since 1990, taking a cue from the US and European markets
Three types of bonds (typology of bonds)
Revenue bonds
General obligation bonds
Double barrelled bonds
14. Pre-requisites of Municipal Bonds Streamlining legal provisions and regulations on direct market borrowings.
Leveraging fiscal transfers for market borrowing
Encouraging public-private partnerships and joint-ventures for implementing projects
Improving the local government’s project development and implementation capacity
Enabling the flow of long-term funds to the urban infrastructure sector through monetary and fiscal reforms and concessions, and
Improving public awareness about market-based financing mechanisms For example, the Government of India has issued guidelines specifying the various steps that municipal governments need to take to access the market
For example, the Government of India has issued guidelines specifying the various steps that municipal governments need to take to access the market
15. Market-Based Financing StrategiesKey Pre-Prerequisite Credit profile – improving it through efficient investment plan and adequate debt servicing capacity – Credit rating
Risk mitigation – Contracting mechanism
Inter-municipal co-operation - Pool finance
Concessions and incentives
Efficient and flexible regulatory structure
Regional intermediaries to promote market-based financing
16. Municipal Bond Market – Exercise 2 Q1. Is there a market for municipal bonds in your context? Identify four driving forces and four constraints in this regard.
Q2. Identify the pre-requisites needed to issue municipal bonds in your context.
17. Municipal Credit Rating Most crucial requisite for accessing the capital market
Essentially done to protect interests of lender or investors
Examines ULG’s creditworthiness, future plans and capacity to service debt
Identifies fiscal weaknesses, paves way for corrective actions
Depends on various credit enhancement mechanisms
18. Municipal Credit Rating (continued) Parameters considered for rating
Economic base of the service area
Municipal finance
Municipal government’s scope and operations
Management quality
Sector and project-specific assessment
Debt profile
Legal and administrative framework
19. Indicators for Credit Ratings