Municipal funding agencies must fill their mandate
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People and MarketsCommentLeader

Municipal funding agencies must fill their mandate

There can be little doubt that, with decentralisation becoming a bigger theme in Europe, the SSA market will be welcoming ever more sub-sovereign issuers — or agencies that offer economies of scale to clusters of local authorities, such as the UK Municipal Bonds Agency or Agence France Locale.

It is a model that has long held traction in Scandinavia, where issuers like Kommuninvest and Municipality Finance are permanent fixtures on investors’ buying lists.

But that does not free the model from criticism. Why should a regional authority pay a higher cost of borrowing when it can alternatively get cash from central government at a small spread over sovereign bonds?

Funding officials at these agencies are confident that, with a more flexible approach to issuance, they can raise money in a more efficient way, whether it is by offering repayment structures that suit specific investors or other means. That, they say, should ensure regions can gain cheaper funding than from the central government pot.

That can also be true when going it alone. For instance, the Greater London Authority — by some distance the biggest sub-sovereign borrower in the UK — estimated that it would save £40m over the next 25 years compared to what it could borrow from central government when it sold a £200m September 2040 inflation-linked bond a few weeks ago.

That deal was certainly novel — the GLA claimed it was the first ever sterling bond linked to the UK’s consumer price index, rather than the retail price index used by Gilt linkers.

But as with so much of UK life, as an issuer, greater London is a special proposition in size, wealth and clout.

In today’s world, where politicians consider austerity next to godliness and debt a dirty word, any sign of a small local authority paying a mark-up by using a means other than the funding available to them from central government will be pounced upon.

New — and existing — municipal funding agencies have a special duty of care to make sure that the reputation of the capital markets is upheld.

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