Municipal Finance: New-York, Paris, Stockholm, Zurich,
Frankfurt and Israel's Funding Options
Presentation for “The Capital Market as a foundation for financing municipal development”
Alois Strasser
Director, Frankfurt
International Public Finance
Tel Aviv, 30 April 2014
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Copyright © 2011 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.
Agenda
Global Funding Alternatives – Overview
US Municipal Bonds
French Twist Towards Capital Market Funding
Nordics And The Swedish Municipal CP Market
Swiss Tradition Of Capital Market Financing
German State Bond And Municipal Loan Market
Israel‘s Municipal Finance Approach
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2.
Global Funding Alternatives - Overview
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3.
Introduction And Overview
Our international methodology when rating local/regional governments
is based on combined quantitative and qualitative analysis of on eight
major components. Two of them are directly linked to funding:
– Institutional framework
– Economy
– Financial management
– Budgetary flexibility
– Budgetary performance
– Liquidity
– Debt burden
– Contingent liabilities
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4.
Different Funding Alternatives
Municipal Finance Alternatives vary between
 traditional bank loan markets, and
 highly developed capital markets.
The use of funding instruments depends on historic developments,
specific legal frameworks and funding traditions, but also mirrors
changes in financial markets and investors.
Global developments suggest diversification of funding sources to
prevent dependence on single sources.
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5.
European Local And Regional Governments Debt Stock By
Country 2013e (as % of total)
Source: Standard & Poors, 2014.
6
European Local And Regional Governments Debt Stock By
Country 2013e (Bil. Euros)
Rank 2013
2013e
Germany
1
767,1
Spain
2
248,8
France
3
134,7
Italy
4
119,8
U.K.
5
106,2
Switzerland
6
83,9
Norway
7
69,8
Sweden
8
54,0
Belgium
9
44,6
Austria
10
29,6
Finland
11
28,9
12
25,1
Denmark
Source: Standard & Poors, 2014.
7
European Gross Borrowing by Country 2013e (as % of total)
Source: Standard & Poors, 2014.
8
European Gross Borrowing by Country 2013e (Bil. Euros)
Rank 2013
2013e
Germany
1
144,5
Spain
2
56,9
Italy
3
18,9
Norway
4
18,9
Sweden
5
18,0
Switzerland
6
17,8
France
7
16,5
Finland
8
8,6
U.K.
9
8,0
Denmark
10
7,0
Austria
11
3,3
12
2,35
Belgium
Source: Standard & Poors, 2014.
9
US Municipal Bonds
Highly developed municipal bond market
– US states, municipalities and municipal enterprises fund
themselves on capital markets. Loan markets are not well
developed for such entities
– US municipals have particular structures (usually a pool of bonds
with maturities of 1 to 10 or 15 years).
– Benefit: Interest income of municipal bonds are exempt from state
income taxes, which is an incentive for private investors, but the
tax advantage is reflected in the pricing of municipal bonds
– Cheaper funding for municipalities
– Municipal bonds go together with ratings
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10.
French Twist Towards Capital Market Funding
Change in banking environment led to change in funding strategies
– Historically traditional bank loan market with only few LRG issuing
bonds (Region Ile-de-France)
– Wind down of dominating municipal finance bank Dexia
suggested new orientation and strategies of LRGs towards capital
market financing
– In past 2 years more LRGs issued bonds, but also Schuldscheine
(transferrable loans)
– Ratings supported capital market access and diversification of
investors, particularly German mortgage banks
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11.
French LRG Gross Borrowing
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12.
Nordics And The Swedish Municipal CP Market
Nordic municipal finance market is characterized by strong municipal
funding vehicles (MFV)
• Denmark: Kommunekredit, Norway: Kommunalbanken, Sweden:
Kommuninvest, Finland: Municipality Finance
• Most MFV are bank-like institutions and only allowed to fund member
municipalities. Guarantee structures.
• MFV have very good capital market access, particularly to
international investors
Swedish LRG developed an active CP market. Swedish LRGs have high
exposure to ST debt and often operate as a group treasury also for its
municipal companies.
Bigger LRGs are also active in LT bond issues
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13.
Nordic LRG Gross Borrowing
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14.
Swiss Tradition Of Capital Market Financing
Swiss Franc Capital Market has a tradition of active bond issuances of
cantonal and city governments
Smaller municipal governments go for traditional bank or insurance
loans.
• Historically, Issuance Center For Swiss Municipalities (ESG), a
cooperative of Swiss municipalities, colleteced funding needs of
participating municipalities, bundles them in bond issues with cross
guarantee structures and issued bonds on the Swiss capital market.
• A default of one municipality and the subsequent call on provided
guarantees let to standstill of this funding option. The entity is in
liquidation.
• Cantons and bigger cities are frequent bond issuers and benefit from
high credit quality demonstrated through ratings
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15.
Swiss LRG Gross Borrowing
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16.
German State Bond And Municipal Loan Market
Historically, German LRGs funded themselves via loans of mortgage
banks which issued public sector Pfandbriefe (cover, collateralized
bonds)
– In early 2000s the Pfandbrief yield curve became particularly
unattracive for German states, as own bond issuances were
cheaper.
– Unattractive market conditions for mortgage banks led to a
reduction of public sector Pfanbriefe from € 800 billion in 2003 to
€220 billion in 2013. Alternatives?
– Since then huge shift from Schuldscheine as collateral for
mortgage bonds to state bonds (benchmarks, private placements)
of German states. Most of them benefit from ratings for bond
issuances.
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17.
German State Bond And Municipal Loan Market (continued)
– Cities and municipalities got funding from mortgage banks and
local savings banks. Banking regulation and weaking credit
qualities of German cities required diversification of funding.
– Structures of joint bond issues of several cities and no ratings limit
market interest.
– Loans from German state development banks assist funding only if
state introduced loan subsidization programs
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18.
German LRG Gross Borrowing
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19.
Israel‘s Municipal Finance Approach
-
Mostly bank loan financing.
-
Only very few bond issues.
-
High dependence on willingness of banks to provide funding
-
Low diversity of funding options keep municipalities and cities
vulnerable
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20.
Contacts
Ronit Harel Ben-Zeev
Eyal Lerer
CEO, Tel Aviv
Client Business Manager, Tel Aviv
Tel: +972/3/75397-03
Mobile: +972/54/4513107
ronit_harel@standardandpoors.com
Tel: +972/3/75397-17
Mobile: +972/50/7695582
eyal_lerer@standardandpoors.com
Ron Slomovits
Rating Analyst, Frankfurt
International Public Finance
Tel: +49/69/33999-245
Mobile: +49/175/5812595
ron_slomovits@standardandpoors.com
Etai Rappel
Associate Director, Tel Aviv
European Infrastructure Finance
Tel: +972/3/75397-18
Mobile: +972/54/6551343
etai_rappel@standardandpoors.com
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21.
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