Wrocław’s municipal bonds will help the local government deliver its services without threatening its debt level.
Local governments in Lower Silesia not only use traditional debt facilities, such as loans or credits, but also raise capital by issuing bonds. Some of the most interesting projects of this kind are municipal bonds issued by Wrocław and by the Wałbrzych Waterworks and Sewerage Group.
“Wrocław’s issue of municipal bonds is certainly spectacular”, says Arkadiusz Babczuk from the Wrocław University of Economics. “It is noteworthy for its sheer scale alone. The combined value of all six series will amount to a total of PLN 72 million,” he explains.
So far, the Polish market for municipal bonds has been dominated by much smaller issues, taken up entirely by the arranging banks. This year’s issue, approved by Wrocław’s city council on October 15, approximates the typical, standard size of municipal bond issues seen on many markets around the globe.
Interestingly, it is not to be a public offering. The city has resolved to place its bonds with 150 pre-identified investors.
“An important advantage of such a fundraising project is the alignment of redemption dates with the capacity of the city budget,” Arkadiusz Babczuk says.
Radosław Mytkowski, legal counsel from Radosław Mytkowski Law Firm, agrees.
“A simplified procedure, flexibility, a long financing term – all of these are clearly the advantages of a bond issue as a way for local governments to raise capital,” Mytkowski explains. “When issuing municipal bonds, the local government is not bound by public procurement regulations. It may decide for itself when to schedule the issue, and align redemption dates with its budget capacity,” he says.
In addition, in the case of traditional credit facilities, principal repayment dates are scheduled every three, six or twelve months, usually without any grace period. “Which significantly contributes to higher debt servicing costs compared to bonds, on which interest is generally paid once a year,” Mytkowski adds.
A carefully planned issue which proceeds in a well-spaced series also helps prevent the accumulation of debt repayment in each year of the long-term financial forecast. This, in turn, enables the issuing municipality to meet the individual debt ratio requirement stipulated in the Public Finance Act.
And that makes bonds a good source of funding, even for local governments with debts as high as those of Wrocław.
“Even though the city’s debt has exceeded 60 percent of its annual income, citizens may rest easy,” Marek Urban, Wrocław’s Treasurer, assures. “In accordance with the new debt ratio which reflects its current debt service capacity, Wrocław still has a large reserve to use,” he says. And explains that the present ratio for Wrocław is 8.6 per cent, compared to the maximum of 12.3 per cent.
Let us now discuss the second, and possibly more important, bond issue in Lower Silesia – the revenue bonds issued by Wałbrzych Waterworks and Sewerage Group.
“This is the first issue of revenue bonds in Poland not performed by a utility company or a district (which has so far only happened in Lublin), but by a group of companies from several districts,” says Arkadiusz Babczuk.
It is going to be a very large issue, worth a total of PLN 107 million, to allow for the final repayment of all of the Group’s current debt liabilities.
It could not take place without employing an instrument which will allow the Group to enjoy exemption from the individual debt ratio requirement mentioned above.
“The regulations which impose this ratio specify that it does not include proceeds from projects posted to a separate bank account or payments due to the holders of revenue bonds,” says Aleksandra Pokropek, legal advisor from FKA Furtek, Komosa, Aleksandrowicz Law Firm.