Johannesburg - The City of Johannesburg planned to issue a municipal bond of at least R1 billion in the first half of next year to finance infrastructure spending and replace more expensive debt, William Mathamela, the head of dealing and acting treasurer at the local council, said at the weekend.

The council has yet to appoint financial advisers to finalise the finer details of the bond issue it will use to upgrade old water pipes, electricity supply, refuse removal and roads.
Some of the council's debt is being repaid at interest rates of about 18 percent, far off the prime lending rate of 13.5 percent.

"We will start the exercise from October 8," Mathamela said.

"The appointment will go to the mayoral council on October 16."

The bond would more than likely be a normal paper issue with semi-annual payments, he said. It would probably be a long-term bond.

"There are not many long-term issues in the market at the moment. Fund managers have long-term obligations and want to lock into these kinds of instruments. There is a lot of paper floating around in the three- to five-year issues and we can probably get much better yields at the long end of the market."

Mathamela said another interest rate cut of at least 1 percentage point before the end of the year would make yields attractive for the council.  

He predicted the Reserve Bank might even reduce interest rates by as much as 2 percentage points by the end of the year and by another 1 percentage point early next year.

Mike Richardson, the director of budget at the City of Cape Town, said:

"It remains to be seen whether the Johannesburg bond issue will be a success."

Perceptions about the financial strength of local governments were extremely negative.

Cape Town, which borrows from commercial banks and the Development Bank of Southern Africa, was battling a cash flow shortage and was not considering a bond issue in the near future, he said. It was also exploring raising more funds from international donors.

Natheem Alexander, portfolio manager at Abvest Associates, said a municipal bond of less than R1 billion would not add much liquidity to the market but would provide another instrument to offer investors.

Malcolm Charles, a portfolio manager at Investec Asset Management, said appetite for municipal bonds would vary among fund managers. He preferred a short-dated bond with a three- or five-year term, as a 10-year bond would increase the investment risk.

He said a number of corporates had entered the bond market but often these were illiquid issues, difficult to buy and sell in the secondary market.