Банкеръ Weekly

Briefs

MUNICIPAL BONDS TODDLE TO THE STOCK EXCHANGE

Interest towards issuing and investing in municipal bonds exists, but there are some legal and purely procedural hindrances to the real actuation of the process, it became clear at the roundtable on that problem, held on Monday (June 24). Efficient legislation in Bulgaria limits the issuance of such secuities. For instance, under the 2002 Budget Act, the amount of a bond issue cannot exceed 10% of the proceeds of local authorities (state subsidies are excluded from the amount). Therefore, even minicipal centres like Sliven and Pazardjik are not in a position to launch on the market issues, whose par value exceeds BGN3-5MN. The guarantees, which a certain municipality could give to its creditors are another problem. Assets cannot be written into the register of special pledges as it has not been legally specified to whose benefit they will be. If the bonds are traded on the stock exchange the person in whose name the mortgage or another kind of a guarantee is issued should be changed for each deal and this is technically impossible. A paradoxical situation might be reached that one person holds a bond and another (who has already sold it) is in a possession of the municipal guarantee. A step towards solving the porblem are the Amendments to the Public Offering of Securities Act, passed this week. They admit primary public offereing of secured bonds only if the issuer has closed a contract with a commercial bank which is a trustee of the securities' owners. The bank will be a kind of a secured creditor of the municipality and thus the problem regarding the register of special pledges will be avoided. It won't be necessary in the future to cite all bond owners as creditors. It will be sufficient to specify the bank that is a trustee. This would certainly make the issuance of bonds more expensive as the fee to the trustee will be paid by the municipality.Anyway, the financing of local authorities through bonds is cheaper. The annual interest to be paid by municipalities for the securities issued by them is preestimated within 9-10 per cent. For comparison, banks are currently ready to extend them credits at a 12-percent interest at least. Moreover, the bonds have a longer maturity period reaching seven years. A grace period may be agreed as well, within which only interest will be paid. At that, the municipality should not have to mortgage assets because it is assumed that as a body of the government it would hardly go bankrupt. At the same time, the expenses for selling the bonds (remuneration to the investment intermediary and fees paid to the State Securities Exchange Commission and to the stock exchange) do not exceed 1% of the total worth of the issue if its par value is BGN3-5MN. The investors in such securitis will benefit too from yields, which banks would hardly offer them. Time will show if their liquidity will be high as well. Having in mind that the mortgage bonds, issued by several banks are trading well, it could be presumed that there would be secondary demand for municipal bonds as well.At least four local municipalities (those of Sliven, Pazardjik, Varna and Dinitrovgrad) are preparing to issue bonds. Therefore, it could be expected that such securities worth more than BGN10MN would be offered on the makter next year.

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