City of Johannesburg Bond: Partial Guarantee

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1 City of Johannesburg Bond: Partial Guarantee

2 City of Johannesburg The City of Johannesburg, in its current state, exists since December 2000 as a result of a complex process of post apartheid metropolitan amalgamation It has a broad range of service responsibilities - including water and sanitation, delivered by specialized agencies and enterprises governed by the Mayor and Council

3 City of Johannesburg - Background South Africa s reforms in the 90s created a sound legal framework for municipal governance and finance Integrated metropolitan cities, enabling the provision of services to formerly disadvantaged area Clear delineation of expenditure and revenue responsibilities among three tiers of government Predictable inter-governmental transfers, no central government guarantees for municipal borrowing, a clear framework for resolving events of municipal financial distress High degree of transparency, disclosure, and stakeholder consultation Implementation was bumpy -- including in Johannesburg Financial crisis in 1997, restructuring in Huge service backlog in townships, low capex and maintenance spending through the 90s Audit disclaimers, employee pension workout Some continuing uncertainties in tax and regulatory framework (regional service levies, electricit sector reorganization) Johannesburg emerged successfully from a tough adjustment process Major improvements in service coverage, especially for the poor Clear organization for service delivery, with commercially-run utilities owned and regulated at arm-length by the City A world-class cadre of municipal managers Improved revenue and expenditure administration Credit rating upgrade to A-.za by Fitch Ratings in 2003

4 Why a Bond Issue? Large capital expenditure plans to address service backlogs, deferred maintenance, population growth City s borrowing requirements too large for traditional bank loans (single obligor limits) Need to diversify financing sources, extend maturity of debt to match asset life

5 The 2004 CoJ Bond Purpose To finance the capital expenditure plans of the City and its utilities (capex program focused on water, urban streets, electricity distribution) To retire some existing, high-cost debt Structure Central Treasury issue by the City, backed by its aggregate revenues (general obligation) Negative pledge clause on major assets Two tranches: April 2004: 6-year bullet bond without enhancement. ZAR 1,000 million (US$150 million equivalent) June 2004: 12-year enhanced bond with 3-year amortization. ZAR 1,000 million (US$ equivalent)

6 Partial Guarantee Why a guarantee The City successfully issued a 6-year bullet bond in April 2004, without enhancement However, the City was also looking for funding beyond 10 years -- but they could not issue beyond 6 or 7 years at an acceptable price without credit enhancement. Structure and amount Irrevocable guarantee of due and punctual payment of principal or interest up to the Guarantee Amount ( first pay-out guarantee) 40% of Bond principal, reduces by the amounts paid by Guarantors, but can be reinstated on cure of default Issued by IFC (AAA international) and the Development Bank of Southern Africa (DBSA AAA local) Guarantee payout results in a 1 year loan between Guarantors and the City

7 Partial Guarantee (continued) Benefits for bondholders Increased recovery given default Decreased probability of default Results for the City enhanced bond rated AA-.za (Fitch), a three notch upgrade from COJ s standalone rating of A-.za. Issue oversubscribed 2.3 times, showing strong market endorsement of both the issuer and the enhanced structure. Strong investor demand allowed for tightening the spread (164 basis points above Treasury benchmark = 71 bp less than the non-guaranteed 6-year bond issued in April 2004 in spite of the longer tenor Long tenor improves the City s debt service profile Market development in South Africa New asset class creates a benchmark for long-tenor municipal debt in SAR New instrument for DBSA, with potential replication in other cities

8 Structure of the bond 12 Year, triple amortizing, unsecured Bond with a coupon of 11.9% and 40% Guarantee Outstanding Principal Guarantee amount of 400 mm Rand to year Guarantee declines proportionately with bond years Debt Service MM Rand Years

9 What was the Bank Group s Role? The World Bank, directly and through Cities Alliance, provided technical support to South Africa s Government, and to CoJ However, IBRD lending to RSA cities with sovereign guarantees would not have been desirable (or legal) at the country s advanced stage of fiscal decentralization Bank Group thus, did not have a financial instrument to provide direct support to cities like Johannesburg In response to the needs of client countries like RSA, that have successfully decentralized, the Bank Group created the Municipal Fund in The Municipal Fund draws on World Bank and IFC skills and provides loans, guarantees and other financial services (booked on IFC s balance sheet) to subnational governments and their service entities, without guarantees from the sovereign. Provides integrated financing and capacity building support to full range of subnationals Several other transactions are being processed in South Africa, China, Vietnam, India Mexico etc.

10 For more information: City of Johannesburg Website Municipal Fund Telephone: + 1 (202) Fax: + 1 (202) municipalfund@ifc.org Web site: