2021 was not the richest year for bond issues, but issuers are going to make up for it in 2022. The number of government bond placements is expected to increase. It is real not just because of big emissions, but also because of smaller issues. The amalgamated territorial communities are planned to appear in the market.
minfin.com.ua summarized last year’s results in this market and collected forecasts for 2022 from experts.
Three times less money and one municipality
Only one issuer, Kyiv, offered municipal bonds in Ukraine in 2021. It carried out three placements of its securities for a total of 1.1 billion UAH:
Ukreximbank, Ukrgasbank and Oshchadbank were the organizers, and the placement took place at PFTS Ukraine Stock Exchange. The nominal value of one bond was 10 thousand UAH. At the same time the floating coupon rate (interest) was set at the level of the National Bank discount rate (currently 9%) + 5% per annum.
“There have been issues with a rate attached to the NBU rate before. But in my memory for the first time securities with such a structure and a term of 3–5 years were successfully placed in this volume. I would like to believe that Kyiv’s bonds will have a secondary turnover,” said Ruslan Kilmukhametov, the Head of the ICU Debt Securities Issue Department.
With high inflation, the National Bank may continue to increase the size of its discount rate in 2022. Therefore, the use of a floating rate is an additional cost for the issuer. But it is more advantageous than fixed for the buyers of securities, as it allows minimizing the risks in terms of profitability. The market evaluated this move positively.
Although, that’s for sure, the investors had no choice in the municipal bond market. Kyiv’s issues were all they had. While the Kharkiv, Lviv and Kyiv city administrations placed bonds in 2020. Actually, 11 issues of municipal securities were placed for a total of 3.9 billion UAH – 3.5 times more than last year.
“The reduction in volume is partly due to some inconsistencies in the budget legislation and regulations governing the issuance of municipal bonds,” Oleg Kyrychenko, the director of Ukrgasbank’s investment department, explained to the Ministry of Finance .
7-8 municipal issues for 2022
This year, financiers expect the municipalities to become more active.
“We expect about 7-8 new issues in the amount of about 3 billion UAH in 2022. These could be issues related to the postponement of plans for 2021. Also promising this year may be the issue of green bonds,” Kyrychenko predicted.
His colleagues confirm the interest of local authorities and note the targeted projects for which the funds from the debt securities will be used.
“Today we are negotiating with several municipalities and their consultants to facilitate the placement of bonds in the market. Mainly the funds are needed for serious long-term infrastructure projects, such as: replacement of sewerage, heating systems, water supply, etc. This way of financing projects is also convenient for contractors, because in case of issuing targeted bonds, the money will have to go exactly to these projects and not to other needs”, Leonid Bilozerskyi, the Head of Sales of Investment Products on Capital Markets of Alfa-Bank Ukraine, told the Ministry of Finance.
From July 1, 2021, a new version of the Law On Capital Markets and Organized Commodity Markets (№3480-IV) came into force, which allows local governments to issue various types of bonds:
Roman Kalinovskyi, an analyst at Freedom Finance Ukraine, told the Ministry of Finance that in 2022 municipal bonds could be placed in Kharkiv, Odesa and Lviv. Also, the reissues are expected from Kyiv.
“Much will depend on the expectations of market participants regarding the discount rate. And also on how aggressively the Ministry of Finance will attract resources — that is, on the volume of domestic government bonds. The behavior of non-residents in the market will also play an important role,” Yurii Hrinenko, the treasurer of Credit Dnipro Bank, told the Ministry of Finance.
The municipal bonds and other debt instruments compete with government bonds. An important advantage of government bonds of the Ministry of Finance is tax benefits that all others do not have. The investors of government bonds do not have to pay taxes (18% income tax and 1.5% military tax for the public). This is a big advantage, it is more profitable for people to buy government bonds. To attract the attention of investors, the municipalities have to put their rates higher.
Appearance of ATCs
A big breakthrough in the municipal bond market may be the appearance of amalgamated territorial communities (ATCs) on it.
“One of the progressive and promising ways to improve infrastructure facilities of local communities is the introduction of municipal bonds trading. This is a new direction of infrastructure development in Ukraine, characterized by a small average volume of bond issuance,” Anton Boldyriev, the Director of the Treasury and Investment Services Department at Ukreximbank, confirmed to the Ministry of Finance.
The Law №3480-IV allowed ATCs to issue municipal bonds. But this is only the first step. One law is not enough; the Budget Code must be amended. The officials said that they had been already preparing the necessary changes.
“We cooperate with other ministries and agencies to amend the legislation, in particular the Budget Code of Ukraine, to allow territorial communities to issue local loan bonds. The NSSMC has also adopted recommendations for implementing or financing environmental projects by issuing green bonds. In the near future, the NSSMC plans to develop appropriate amendments to the regulations”, – Alla Papaika, the Director of the Securities Registration Department of the NSSMC, reported to the Ministry of Finance
The experts believe that as soon as ATCs have the opportunity to place municipal bonds, they will start using it immediately. The local authorities need funds.
“The need for money from local budgets is huge, it is hundreds of billions of UAH. Such volumes of emissions can be placed among banks, non-state pension funds, insurance companies and individuals, if there are attractive proposals for a risk premium,” Yurii Aleksieienko, the Head of the Investment Department of asset management company “OTP Capital”, told the Ministry of Finance.
The financiers hope to establish the necessary regulatory framework for municipal borrowings of territorial communities in the first half of 2022, as well as a rapid entry of ATCs into the bond market.
Estimates of volumes and rates
The amount of borrowing by municipalities will directly depend on its size and each region’s development plans.
“The volume of bond issues for large cities will start from 100 million UAH, and for smaller issuers will start from 10 million UAH,” the press service of the Oschadbank told the Ministry of Finance.
The financiers believe that the Kyiv practice of floating rates on municipal bonds will remain. As for profitability, they give different forecasts. For example, Oleg Kyrychenko from Ukrgasbank expects in 2022 3–6% per annum and plus the discount rate of the National Bank (now 9%). Although his colleagues do not exclude higher price points.
“I believe that larger issuers will issue debt securities with a premium of +5−6%, while smaller issuers will have to pay a premium of 7% or more. The average issue will be 20-40 million USD. An important factor will be the presence of a secondary market. The issuer, which will try to ensure the secondary market during the emission process, will be able to attract resources at lower rates in the future,” Leonid Bilozerskyi said.
The standard risks will remain. According to Yurii Hrinenko, they may be exacerbated by a prolonged pandemic, which may provoke a decrease in revenues to local budgets. That is, there may arise questions about the sources of repayment of municipal borrowings.
The private investors should always calculate the returns so that it covers taxation. That is, it is better to choose municipal bonds with rates that exceed the current prices of government bonds by 19.5% (income tax + military fee). Only in this case such investments will make sense, otherwise investments in government bonds will be more profitable. The financiers recommend people to start investing in municipal bonds from 300-500 thousand UAH.
Author: Olena Lysenko
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