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The establishment of a funding strategy for your Municipality

The establishment of a funding strategy for your Municipality. Funding Strategy. Outline of presentation. Outline of presentation. Municipal debt absorption capacity. Municipal borrowing requirements. Investors market. Interest rate environment. Guiding principles.

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The establishment of a funding strategy for your Municipality

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  1. The establishment of a funding strategy for your Municipality Funding Strategy

  2. Outline of presentation Outline of presentation Municipal debt absorption capacity Municipal borrowing requirements Investors market Interest rate environment Guiding principles

  3. Municipal borrowing requirements • Determine multi-year requirements from capital budget Billed income Expenditure incl non cash items Change in debtors, creditors & stock Non cash items in income & expenditure Interest earned Min Interest paid Capital grants Min Capex • Determine cash flow surplus (funding from own revenue) Real cash available • Determine capital grants • Determine the required cash & investment balance Own cash available for capex • Borrowing requirement to be funded through external loans

  4. Municipal debt absorption capacity • Unfortunately; limit to borrowings • Debt absorption capacity: • Indicators • Debt to income < 50% • External interest/ Total operating expenditure < 7,5% • Net cash flow/external interest > 1X • Debt requirements should be limited to absorption capacity

  5. Interest rate environment • Short-term outlook: • SARB Monitory Committee Meeting • Strong Rand • Drought • Credit demand • Long-term outlook • International Economy • Where in the cycle are we?

  6. R157 yield curve

  7. R157 yield curve

  8. Interest rate environment - continued • Fixed or floating rate • Holding/carry cost of funds • Municipality’s average cost of funding

  9. Investors Market • Traditional investors: • DBSA (50 – 55% market share) • ABSA (total banking sector 20 – 10% market share) • INCA (30 – 35% market share) • New investors: • Investec • FirstRand • SCMB • Nedbank • Barclays • Future investors: institutional investors : (the Joburg Bond)

  10. Guiding principles • Utilise a multi-year approach • Target banks and investors • Enhance profile through pro-active interaction • Make use of funding with a term longer than 10 years • Obtain facilities without incurring commitment fees • Meet the requirements of the Municipal Finance Management Act

  11. Recommendation for a funding strategy • Take a multi-year funding strategy to Council for approval • Combine the strategy with a view on the interest rate environment • Consider carefully which investors to approach

  12. CONCLUSION • Do not time the market, your task is to provide funding on a sustainable basis and to lower the average cost of funding. • You are welcome to contact INCA for assistance and guidance.

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