3 Replies Latest reply: Feb 1, 2015 1:44 AM by jdgorelick RSS

    Best Practice Guidelines for Municipal/Corporate Bonds (anyone?)

    545477 C4D Extraordinaire

      The Capital Market Authority in Uganda is asking for best practice municipal bond guidelines. They’ve issued their own corporate bond guidelines (LINK). I mentioned Mexico and South Africa as potential examples but I’d like to check with you in case you have better examples and perhaps the actual guidelines for sharing. India has also issued municipal bond guidelines recently (Dec 2014), LINK, with the following key features:

       

      • Credit rating mandatory. Minimum rating A+
      • Minimum maturity 3 years
      • Option to buy-back bond at face value
      • Separate account to manage money
      • Municipality net worth must not be negative for three years
      • Utilization solely for projects, mentioned in offer document (with 20% of project-cost contribution from issuing entity)
      • Strict monitoring

       

      Would be useful to gather here documents/experience/viewpoints from our members.

       

      Cheers,

      Joshua

        • Re: Best Practice Guidelines for Municipal/Corporate Bonds (anyone?)
          545477 C4D Extraordinaire

          Dear Community Members, I'd like to share with you the feedback I received from highly esteemed colleagues who kindly replied (via email) to my query above. I hope you'll benefit from these contributions as I have. Please contribute your comments/experience/references to this discussion!

           

          • Linked here you’ll find a practical and very recent set of guidelines for municipal bonds by the India regulator (SEBI).
          • You may find useful (for engagement/awareness purposes), a two-page brochure with ten steps suggested for municipalities that are considering to issuebonds. The document, courtesy of Octavio Chavez, is only available in Spanish at this point.
          • David Painter highlighted the importance of ensuring that a framework (laws/regulations) on sub-national defaults underpin the munibond guidelines. The key is to head off the assumption that there are implicit guarantees on munibonds.
          • On the point above, Johan Kruger suggested to consider alternatives to thefull-fledged default route, e.g. provisions for “soft rescheduling” of payments and collecting monthly rather than semi-annually or so.
          • Johan Kruger pointed also to other aspects to be factored in: importance of "granny clauses" as a critical component for financial authorities (protecting issuers from predatory terms); whether dematerialization (i.e. paperless/electronic transactions) is feasible; settlement period; penalty interest conditionalities; requirements for a full prospectus (which I know you already require); provisions for medium-term notes and general obligation bonds in addition to project bonds. He referenced the following handbook: African Fixed Income and Derivatives Handbook (AfDB, 2010), organized by country.
          • Benjamin Darche highlighted the importance of looking from the beginning at the long-term picture with potential munibond issues in Regional and International markets, by considering guidelines consistent with East andSouth African Markets (and regulators) and in the very long term, London/New York.

                

                 Some key criteria to consider for implementation over time:

                • International Financial Reporting Standards (IFRS) for municipal financial statements.
                • Credit Ratings from Rating Agencies that comply with IOSCOPD "Code of Conduct" (as suggested by the East African Member States Securities Regulatory Authorities – linked here).
                • Initial disclosure and on-going disclosure standards (should be consistent with Rating Agency on-going reporting requirements using the same reports for regulators, rating agencies and investors).
                • Secondary market trading regulation.

           

           

          Further comments/references/experiences very welcome!

          • Re: Best Practice Guidelines for Municipal/Corporate Bonds (anyone?)
            545477 C4D Extraordinaire

            With thanks to my colleague John Kalisa in Rwanda, please find here the official gazette No 12 of 24 March 2014 with the Guidelines on
            issuance of municipal bonds in Rwanda (from page 67).

             

            • Re: Best Practice Guidelines for Municipal/Corporate Bonds (anyone?)
              jdgorelick C4D Connoisseur

              Dear Joshua,

               

              Hi.  I'm not much of a regular poster on the exchange, but read on a somewhat frequent basis what's put up there.  I read through the guidelines for Uganda's CM activity, and have a couple of questions/comments. 


              First, I did a quick conversion of minimum share size and saw that the proposed minimum is equivalent USD 175; while this is fine for institutional investors, it will be prohibitive for retail investors.  In the case of Dakar (where I've been the city's lead technical and financial advisor on the Dakar Municipal Finance Program, the initiative intended to culminate in the launch of the region's first municipal bond), our proposed minimum size is about 10% of this - roughly USD 20 - which is to encourage retail investment.  Looking, similarly, at Jozi bonds in South Africa, the investment size is similarly appropriate for retail investors. 


              Second, I noted that there was mention and description of the need for a Trustee, but this has been the plague of the better part of two years of conversations in francophone Africa.  While anglophone Africa might have a clearer practical definition of the word, I'd still highlight the need for more detail here.

               

              If there's anything that I can do to help and/or support you on this, please let me know.

               

              Jeremy