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Investors buy City bonds
05 April 2011
 

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The response to institutional bonds issued by Johannesburg earlier this month shows a surge of investor confidence in the City, says the City manager.

INVESTORS have displayed strong confidence in Joburg’s buoyant economy and institutional bonds, signalling persistent interest in the state of its finances and its future prospects.

 

City Manager Mavela Dlamini
Support from investors shows strong confidence in the City, says City Manager Mavela Dlamini
These are the sentiments of Mavela Dlamini, the City manager, who says institutional bonds issued earlier this month indicate that investor confidence in Joburg has surged. “There is strong confidence in the market and among investors who have analysed the City’s balance sheets and future strategies,” he says.

 

Dlamini says through investing in the new bond, COJ07, “investors have shown that they do not share the doom and gloom reporting triggered by political agendas”.

The City is gratified by the involvement of investors and their continued support in financing its capital expenditure programmes since the launch of its debut bond issue COJ01 in 2004, its cumulative bond issuance to date, he adds. “The support from investors demonstrates confidence and a long-term view taken on the City of Joburg.”

Joburg has registered a R13-billion domestic medium term note programme under which the sourcing of funds has been diversified to include commercial paper, floating rate notes, institutional bonds and Jozibonds. The bonds require the lender to have a minimum of R1-million and run for a year upwards.

The longest long-term bond matures in 2023.

Through the bonds, the City borrows money at an interest rate slightly above what banks offer, using the money to finance its debts and fund other capital projects.

Sinking fund
Dlamini says investors are particularly impressed by the City’s “commitment to provide for redemption of all outstanding bonds through periodic contribution into the sinking fund”. So far, it has been able to redeem its R1-billion COJ01 bond through the sinking fund and has assets of more than a billion rand towards the redemption of bonds.

“There is high praise in the investment community for the way in which the City managed the global economic crisis and was able to keep services going and growing despite a significant decline in revenue income.”

After the global economic meltdown, the international ratings agencies, Fitch and Moody’s, reviewed Joburg’s finances and balance sheet – and kept its ratings stable for the short- and long-term outlook. In 2009, both agencies said Joburg had achieved a long-term national credit rating of AA-(zaf), signalling that it was able to meet its financial commitments.

Through COJ07, it has successfully raised R850-million towards its capital expenditure for the 2010/11 financial year. “This is the seventh successful institutional bond issued since 2004 and it is in line with the City’s objective of raising funding at cost-effective levels and reduction of the overall weighted average cost of borrowing,” Dlamini explains.

The support from investors demonstrates confidence in the long-term future of the municipality, he adds. “There are clear signs that the City’s finances are stabilising following the 2010 World Cup expenditure programme, and this is in line with the first phase of the financial turnaround strategy.”

The strategy is tailored to restore high levels of cash reserves and reduce debt over the long term, Dlamini explains. “This strategy, debated and adopted in council provides for a stabilisation phase of one to two years, followed by a consolidation phase and eventually long-term sustainability

Municipal bonds
“Clearly the investor community is of the opinion that we are on track to meet our goals and they are demonstrating this by investing in our municipal bonds and by offering competitive pricing.”

Over the past five years the City has overhauled its financial management, enabling it to quadruple its capital budget and boost its credit rating. It has also received consecutive unqualified clean audit reports from the auditor-general.

Dlamini says the latest report from the auditor-general for the financial year that ended on 30 June 2010 is still being finalised. “We expect some tough findings in the AG’s report, but also significant recognition for the quality of our financial management.”

Johannesburg is the only municipality in the country to have consolidated the accounts of its core administration with municipal-owned entities under one control. It is the first municipality to enter the retail bond market. The implication is that the City has to meet higher accounting standards that cover the entire spectrum of its activities, adds Dlamini.

“It is simply not true that the City has overspent on its operating or capital budgets as claimed by certain political party representatives. The draft financial statements recently presented to council clearly show that the City ended the 2010 financial year with a surplus of R2,9-billion.”

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