October 7, 2003
By Thomas Thale
IN what could be a first for a South African city, the City of Johannesburg is to investigate the possibility of issuing municipal bonds.
City Treasurer, Jason Ngobeni, expressed confidence that the first municipal bonds could be issued in the third quarter of 2004. "By the end of October, we will have appointed advisers who will ensure that the bond is structured properly right from the beginning and addresses both the requirements of the issuer (the City) as well as potential investors."
The advisers will advise the City on the best way to structure and to float the bond itself, Ngobeni said.
Municipal bonds are debt obligations issued by government entities to members of the public to generate income to meet their capital expenditure. The issuer of a bond guarantees to pay interest (coupons) annually and to repay the principal debt on a specified date. The interest paid on a bond is tax-deductible. Issuing bonds is standard practice for cities in the developed world.
The issue of bonds will enable the City to eradicate its Capex backlog of over R10-billion, Ngobeni said. "Some of these capital projects can generate additional revenue for the City, while others will improve the social conditions under which most people live," he said.
Reinvesting money into capital projects, said Ngobeni, will encourage more private sector investment, thus creating jobs and increasing business confidence in the City. Issuing bonds could enable the City to increase its capital expenditure drastically from just over R1-billion in the current financial year.
The timing is right for the City to issue bonds, the treasurer said. "Our balance sheet is strong. Our credit rating has improved from BBB+ to a solid A and the occupancy rates in the city centre are steadily improving." Two rating agencies, Fitch and CA Ratings, recently upgraded the City's credit rating. For the first time in over a decade, the City this year submitted signed financial statements to the auditor-general on time.
Head of dealing in the treasury department, William Mathamela, agreed the time is right for the City to issue bonds. "Interest rates are at their lowest in months, and are expected to fall even further," he said. "This makes it cheaper to issue bonds in an environment of declining interest rates. The annual yields will be much lower."
The City plans to undertake investor road shows soon, following the appointment of advisers, targeting institutional investors, with a particular emphasis on fund managers, said Mathamela. "The real test will be when investors evaluate the bond," he added.
Ngobeni said the City has already formulated a plan for introducing the bonds. "The advisers will plug into our existing plan. They might want to review it, but they'll have something to work from."
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