Doing it for themselves
The decline in bank lending has seen several new European municipalities start to plan their own funding agencies.
Regional agencies such as Kommunalbanken, Kommuninvest, Municipality Finance and KommuneKredit in the Nordic region and the likes of Bank Nederlandse Gemeenten and Nederlandse Waterschapsbank in the Netherlands have long been a part of the SSA debt landscape, as too have German states. They are familiar and trusted borrowers.
But municipality funding has not had too much of a profile in the rest of the Europe. That is all starting to change. There is a recognition that this could be an efficient way for other parts of Europe. As Lee Cumbes, head of European SSA DCM at Barclays, pointed out, two events have been a spur to the rest of Europe to start to look at municipal lending in serious detail.
“The first is the decline in bank lending – although there may be signs some of that has eased – and then there is also the recognition that Dutch and Nordic agencies have done very well,” he said.
Take the UK for example. There had been little interest in setting up any kind of a municipalities bond programme as many of its functions have been performed by the Public Works Loan Board – a statutory body operating within the United Kingdom Debt Management Office and whose function it is to lend money from the National Loans Fund to local authorities and to collect the repayments.
As Matt Thomas, managing director of UK DCM at Barclays, pointed out: “If you are a Birmingham or a Wandsworth and you can borrow from the PWLB at 60bp over Gilts, it has been difficult to justify a move towards an alternative source of financing.”
But there is a growing recognition that some kind of a change is needed. With 75% of council long-term borrowing with the PWLB, councils saw that they were vulnerable to non-market driven changes in the rates at which they can borrow. And that was a possible threat to long-term capital planning.
A municipal bonds agency was mooted at the beginning of 2012 and was finally launched in December last year as the Local Capital Finance Company, supported by 48 councils.
“The decision to move into the launch phase is a significant and important step. It reflects the overwhelming appetite among local authorities for us to make this happen,” said Michael Lockwood, executive director of the Local Government Association, and director of the Local Capital Finance Company.
The clear aim is to get it up and running in time for March/April, which is traditionally when English councils are looking for funding. It looks on course to do so. Merrick Cockell, former chairman of the Local Government Association, was named chairman of the agency at the end of January.
So far, there are few clouds on the horizon. Bankers suggest that a rating similar to or better than the UK government is likely. There is little doubt about appetite from the investor side. Investors in the sterling market appear excited about having a different product to buy. Diversification, they say, is always good.
Even concerns about the first issue are muted. There is a consensus that a simple 10-year issue is likely to appear first of all, and that for comps it will look towards Transport for London issuance. The government-guaranteed UK-based borrower, for example, was last in the market in March last year with a £370m 50-year senior unsecured deal that was priced at 55bp over the 4.25% December 2055 Gilt.
But Barclays’ Thomas points out that for future success, a municipal bond agency needs “consistency of issuance”. There would be comparatively little interest if the agency only tried to print occasional £50m private placements. Any debt issuance has to be targeted at institutions.
And given the current low interest rate environment, the agency “must make clear to potential bond investors what happens in a stress scenario”, he said.
There is movement, too, in France with the establishment of Agence France Local. It was founded in December 2013 to fund municipalities, but the need to gain a banking licence meant that it was not formally established until December last year. Wholly owned by French local authorities, the driver there too was the general decline in bank funding.
According to the AFL’s own presentation, only 55% of municipal funding was covered by banks in 2013.
By the end of last year, the AFL had exactly 100 local authorities and €110m (US$127.5m) of commitments.
“Investors know that this is a model that works. The agency was inspired by the Nordic-owned banks. In the Netherlands, for example, two such agencies were 100 years old and 60 years old last year. They now manage almost the entire municipal finance market,” said Yves Millardet, president of the AFL in a recent interview.
He reckons that the first bond from the AFL will be either €500m or €1bn and will emerge in February. Millardet expects it to offer 100bp–150bp savings for the local authorities on their borrowings.
With two successes from Britain and France, other municipalities around Europe will be looking very closely as what they too might be able to do.