Transcript CoJ Template - Development Funds

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
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
The City of Johannesburg
Sources of operating income
Fines & Licences
Other
2%
4%
Subsidies
3%
Electricity
29%
Refuse
3%
Payroll &
turnover taxes
13%
Water &
Sewerage
23%
Property Rates
23%
Sources of Capital Funding
Provincial housing
grants
25%
National infrastructure
grant
8%
Developers
contributions
7%
Loan funding
60%
Overdraft & call bonds (ZAR million)
500
481
400
351
300
250
200
100
0
24
0
-3
-100
-189
-200
-300
-395
-400
-466
-500
1995/6
1996/7
1997/8
1998/9
1999/0
2000/1
2001/2
2002/3
2003/4
Capital expenditure (ZAR m)
1,978
2,019
2,064
2006/7
2000
2005/6
2250
1750
1500
1250
1,346
1,280
1,295
1,105
1000
949
750
2004/5
2003/4
2002/3
295
2001/2
1998/9
1997/8
1996/7
1995/6
309
1999/0
250
0
632
592
2000/1
500
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
 Comprehensively regulated financial markets
 Municipalities required to comply strictly to legal framework
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
Parastatals /
Utilities
7.5%
Water
Authorities
3.5%
Municipalities
0.4%
Corporates
15.1%
Central
Governm ent
73.5%
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)
Payment structure (COJ02)
(12 Year Amortizing Bond with assumed 13.5% coupon and 40% Guarantee)
1000
800
600
Outstanding Principal
Guarantee amount of ZAR 400 mm declines
proportionately with bond years 9.5-12
400
Debt Service
200
Years 1
2
3…
…8
9
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
COJ01
COJ02
Tenor
6 years
9.5 - 12 years
Spread
230 bps
164 bps
Coupon
11.95%
11.90%
Oversubscription (total)
1.5
2.3
Oversubscription (clearing price)
1.3
1.5
New investors
10
5

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)



positioned ourselves for higher capex going forward

`New constituency’ – enhanced credit discipline
Reduced the average cost of borrowing


including some very risk-averse investors
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
Change in liability profile (ZAR m)
3,000
Pre bonds
Post bonds
2,500
2,000
1,500
1,000
500
0 - 1 year
1 - 5 years
5 - 10 years 10 - 15 years > 15 years
20
04
20 /04
04 /13
20 /04/
04 20
20 /04
04 /27
20 /05/
04 04
20 /05
04 /11
20 /05/
04 18
20 /05/
04 25
20 /06
04 /01
20 /06/
04 08
20 /06
04 /15
20 /06/
04 22
20 /06
04 /29
20 /07/
04 06
20 /07
04 /13
20 /07/
04 20
20 /07/
04 27
20 /08
04 /03
20 /08/
04 10
20 /08
04 /17
20 /08/
04 24
20 /08
04 /31
20 /09/
04 07
20 /09
04 /14
/0
9/
21
COJ01: spread above benchmark
2.350
2.300
2.250
2.200
2.150
2.100
2.050
(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
 Know
& officials
your problems, have a plan to deal with them, and
show some progress.
 Clean audit report?
Lessons learnt by CoJ

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!
Thank you …
 Johannesburg
home page:
http://www.joburg.org.za