A R1,2-billion municipal bond issued by the City of Johannesburg was oversubscribed, signalling continued investor confidence in the city.

THE City of Johannesburg successfully issued a R1,2-billion municipal bond on 31 May as part of its Domestic Medium Term Note programme, its fourth so far.

The note programme allows the City to issue up to R6-billion in bonds until 2010, without having to provide additional documentation before each issue.

It has already issued a bond under the programme, the CoJ 03, an unsecured R700-million bond maturing in eight years. That bond was oversubscribed by almost four times, with investors bidding R2,6-billion on it.

The latest bond is senior, unsecured, listed R1,2-billion bond, which matures on 5 June 2018. According to City Treasurer, Jason Ngobeni, this bond was oversubscribed as well, with R6,5-billion in total being bid on it.

The lead manager on the issue was Standard Bank, while Barnard Jacobs Mellet Securities acted as advisors to the issuer. All parties will sign the bond documents on 1 June, while complete settlement will occur on 6 June.

"It was a real challenge to allocate this amount. We had to do it in a way that would satisfy everybody," he said.

Interest on the bond, to be payable twice annually, is fixed at nine percent, which is 120 points above the R203 national government benchmark bonds. The bond, the CoJ 04, will be listed on the Bond Exchange of South Africa along with the other City bonds.

"We have nine investors for this bond, four of which are new. The interest was extremely huge and it was interesting to see bids of such magnitude," Ngobeni added.

However, he said the most encouraging sign was the presence of investors who had previously shown no interest in the City of Johannesburg's municipal bonds.

The bond brings the total amount issued under the medium term note programme to R1,9-billion, meaning the City can still issue bonds to the value of R4,1-billion as part of the programme before having to revise the terms and conditions contained therein.

"We are very satisfied. We have created a new benchmark in the 12-year bond area, not only in terms of municipalities but also for corporates," said Ngobeni.

Bonds
Subscribers to the City's bonds are mainly banks' conduit funds, which had generally tended to shy away from investing in municipal bonds, or only invested within a certain credit-risk bracket.

The bond issue comes shortly after both Fitch Ratings and CA-Ratings improved the City's credit ratings.

Locally based CA-Ratings upgraded the City's long-term credit rating from zaA to zaA+, while its short-term rating was affirmed at zaA1.

Fitch Ratings upgraded the City's long-term national ratings from A- (zaf) to A (zaf), while its short-term credit rating was affirmed at F1 (zaf).

Fitch Ratings has a positive outlook on the City's credit ratings while CA-Ratings have forecast a stable outlook.

According to Ngobeni, improved ratings help reduce debt-servicing costs as a percentage of overall expenditure. The City currently spends about five percent of its total expenditure on servicing its debts. Joburg fiscal policy allows for debt-servicing costs to reach a maximum of seven percent of total expenditure.

At a municipal bond conference hosted by Joburg in April, Ngobeni stated that pressures caused by the need for infrastructure development would drive municipalities to seek alternate and more creative ways of raising capital.

These could include issuing municipal bonds, making use of asset-backed funding as well as entering into public-private partnerships. However, the City will continue to source funding from traditional avenues as well, said Ngobeni, referring to the country's banks and development agencies.

"Municipalities are net borrowers, and to fund your capital expenditure you need a sustainable source of capital - the best place to source those funds is on the capital markets," he said.

He added that the performance of local economies of the country's metros would be critical to the success of the Accelerated and Shared Growth Initiative for South Africa, or Asgisa. A key component of Asgisa is the provision of quality infrastructure.

During his budget speech on 24 May, Johannesburg's Executive Mayor, Amos Masondo, said the City would spend some R14-billion on capital expenditure projects over the next five years.