Johannesburg has paid out the first bond it issued, way back in 2004, with R1-billion going to the far-sighted investors who took up the offer.
IT was a big bond day in the life of the City's finance department on 13 April. On the day, a whopping R1-billion was paid out of City coffers to investors.
MMC for finance, Parks Tau (Photo: Enoch Lehung, City of Johannesburg)
And with some satisfaction, according to the mayoral committee member for finance, Parks Tau. "We have settled our investors and this is an excellent indication that the City is very capable of handling its finances," he said.
The bond was issued in April 2004, at an interest rate of 11,95 percent. This was the first bond issued by the City - there have subsequently been five more bond issues, the last one in September 2009, raising some R7,8-billion for Joburg.
The original six-year bond was payable on a twice-annual basis, with a final payment in 2010, now made. "It was well received by the market then, attracting 10 new institutional investors," confirmed Tau.
The City has set a benchmark in the capital markets, borrowing money at an interest rate slightly above what banks offer. The capital is used to finance City debts and fund capital projects.
"Johannesburg has set a precedent among municipalities, being the first to issue and redeem a bond of this magnitude," Tau explained.
Joburg has also been the first municipality to raise short-term funding in the commercial paper market. A commercial paper is a short-term loan - usually less than a year - to be paid at the end of an agreed period. It has issued three commercial papers, worth R1.6-billion. Already R1-billion has been repaid, with the remaining R600-million to be paid on 22 April.
"The City of Johannesburg takes this opportunity to thank all its investors for the continuous support and confidence placed in the organisation," Tau added.
Idea raised
The idea of raising capital in such a way was first mooted by the City in 2001. In 2003, City officials undertook a study tour to Mexico to learn international best practice in the municipal bond market.
In 2006, a Sinking Fund was established with the goal of managing and ensuring timeous and successful redemption of all bonds. In 2005, Joburg appointed a consortium made up of Standard Bank, Barnard Jacobs Mellet and Legend Capital, to create a Domestic Medium Term Programme to manage the bonds.
A second consortium comprising Absa, Barclays Bank and Vunani Capital was chosen to manage the inaugural issue under the programme.
"The City has benefited tremendously by issuing bonds through: access to a wider investor base, minimising [the] asset-liability gap, reducing the cost of funding, financial discipline and diversifying the funding source," explained Tau.
Good record
Johannesburg has a good record in managing its finances. World rating body Fitch Ratings confirmed that it achieved a long-term national credit rating of AA-(zaf) for 2009. It achieved a short-term rating of F1+(zaf) in 2009.
The rating refers to the relative ability of an entity to meet its financial commitments. The City has shown steady improvement in its Fitch credit rating over the past six years - its long-term national credit rating was A-(zaf) in 2003.
Earlier this year, it received its third consecutive unqualified report from the auditor-general for the 2008/09 financial year, and in May 2009 it announced a budget of R26,3-billion, the biggest municipal budget in the country.
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