Nordic munis: need for diversification

  • 01 Mar 1999
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Nordic municipal borrowers are no newcomers to the international capital market. Gothenburg, for example, was the first Swedish borrower to tap the Samurai market as far back as 1983, since when, according to Inger Lundin, first financial officer at the City of Gothenburg, about 70% of the municipality's borrowing has been in international markets with only the remaining 30% generated locally.

Nordic borrowings in the international market have not, however, always gone down very well with investors outside Scandinavia.

A DM200m four year deal launched in September 1997 by the City of Stockholm via DGZ Bank, for example, was lambasted at the time by one commentator as far too tightly priced and in which he had participated exclusively for relationship reasons.

Stockholm has not been the only Nordic borrower to have this sort of criticism levelled at it, with similarly unenthusiastic remarks made about issues launched by regional counterpart such as Copenhagen in the Swiss franc market.

In part, say bankers, some municipal issues launched by Nordic borrowers in general and by Swedish ones in particular have opened themselves up to the accusation that they have been mispriced because cities such as Stockholm and Gothenburg believe that they ought to be seen as providing virtually identical risk to the Kingdom of Sweden.

This belief is perhaps best illustrated by the fact that both cities have declined to join Kommuninvest, the special purpose borrower which was established in the mid 1980s chiefly to raise funding for some of the smaller and weaker regions, by which time the two had already established borrowing track records.

"The dilemma for a double-A plus borrower such as Stockholm is that if it were to become a member of Kommuninvest it would somehow be subsidising the borrowings of the weaker municipalities," one analyst explains.

At Stockholm itself, the city's treasurer Peter Antonsson appears to confirm this view when he says that his benchmark for borrowing internationally is generally the Kingdom of Sweden rather than Kommuninvest.

He adds that if Kommunivest does sometimes borrow at better rates than the Swedish capital city, it is more a reflection of the SPV's status as a frequent borrower than of any credit differential between Kommuninvest and Stockholm.

Nevertheless, while issuers such as Stockholm, Gothenburg and Malmo may well be ahead of most other Swedish municipalities in terms of creditworthiness, ratings agencies insist that there is a clear difference between them and the kingdom, irrespective of what treasurers in some of the principal Swedish cities may believe.

The Standard & Poor's view, explained in a special report on Nordic local governments published in 1998, is that "the central government would [not] automatically honour the debt of a local government in distress. More importantly, the timeliness and extent of the supportive measures are by no means distinct."

One London-based banker is especially critical of the approach which some of the main Nordic borrowers have adopted towards the international market. "Stockholm and Gothenburg in particular have enjoyed very strong credit ratings and as a result they have attracted a very good retail following in Europe," he says.

"The City of Stockholm for example has issued in Canadian dollars, Swiss francs, Luxembourg francs and so on, so its approach has clearly been very retail-targeted. I think it would be very dangerous for issuers like Stockholm to assume that the retail base will stay there for ever."

The City of Stockholm, for one, does not seem to be in a hurry to alter its borrowing policy in the light of the launch of the euro. Antonsson says that the borrowing strategy this year will be similar to previous years and that the sources of the Skr5.5bn the city plans to raise will be determined purely on the basis of pricing and swap opportunities - given that everything needs to be swapped back into kroner - although there is no political compulsion for the city to chase every basis point available.

"In the treasury department we are free to do whatever we perceive to be best for the municipality of Stockholm," says Antonsson. "If that means we feel it would be better over the longer term to leave one or two basis points on the table we would do so."

Has Stockholm ever done this in the past? No, says Antonsson. Would it consider doing so in the future, if it results in a broadening of the investor base? "Not really," he replies.

At Standard & Poor's in Stockholm, managing director of public finance ratings Caroline Wingardh does not feel that Sweden's main municipal issues necessarily deserve flak for their approach to the international capital market.

"My impression is that Stockholm is very well established on the international market and I think it is reasonable for the city to pick markets where conditions are best. One of the things we look at in the ratings process is financial policy, and we like to see a well diversified borrowing portfolio avoiding currency or interest rate risk, which is what the main Swedish municipalities have followed."

In 1999 and beyond, Wingardh believes there will be an increasing flow of Euromarket issuance emerging from Swedish local authorities. S&P already rates 10 Swedish sub-sovereign borrowers and Wingardh believes this total will double within the next 12 months.

"The key theme for Swedish municipal borrowers is diversification," she says. The reason for this, she says, has nothing to do with a likely reduction in central government transfers, nor is it a reflection of increased borrowing levels among Swedish sub-sovereign issuers.

"The municipal sector in Sweden will probably see lower aggregate debt levels going forward," she says. "Because they will be forced to allocate more of their reserves to cover their pension liabilities from the point of view of cashflow, they will be building up their liquidity. That will provide own-source funding for their investment programmes."

Nevertheless, Wingardh estimates that this will still leave Swedish municipalities with borrowing requirements this year in the magnitude of Skr15bn, most of which will be accounted for by refinancing needs.

This tallies with the funding requirement at Gothenburg, for example, which Lundin says will probably amount to Skr2bn this year. She adds that there is no way of detailing a precise figure because part of the city's responsibilities are to raise funds for companies owned by the municipality, which are free to borrow from alternative sources if they can locate cheaper funding possibilities elsewhere.

While usual suspects such as Gothenburg and Stockholm are therefore likely candidates for international bond issuance this year, Wingardh suggests that a number of new Nordic issuers will also come to the market.

"We have already seen a number of municipalities move away from the bank market and going mainly to the domestic MTN sector," she says, "but several are also looking at setting up international MTN programmes. We have a constant dialogue with them and we know that this is an important part of their future funding strategy."

The reason, she says, is two-fold and mirrors what is happening elsewhere in Europe.

On the one hand, the domestic banking market is not quite as keen on lending to local authorities as it has been in the past.

"The banks have historically lent at no margin at all or even at negative margins to municipal borrowers," she says, "and at some point banks' shareholders are going to start demanding a higher return on capital."

On the other, Wingardh says that Scandinavian municipal borrowers are very alive to the new opportunities which the launch of the euro is providing for local authority issuers to tap into a broader investor base which is looking for the relative security of sub-sovereign credits twinned with the higher yield which they provide. PM

  • 01 Mar 1999

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4 Bank of America Merrill Lynch 20,332.10 65 5.50%
5 Goldman Sachs 20,005.21 49 5.42%

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