Innovative practices in Bulgaria
Sharing innovations for improving local self-government
Euro Bonds Emission
Municipal Bank
Background
In 1998, the Municipality of Sofia decides to emit a contractual loan. This kind of loan is preferred by the municipal administration for several specific reasons:
1. Lower interest percentage;
2. Insignificant local market liquidity;
3. Presence of the country on international markets.
The combination of all these factors leads to the decision of starting the emission of euro bonds. The man characteristics of the euro bonds are the following:
- there is no need of guarantees for their emission, except for the credit rating of the institution, developed by a world famous credit agency;
- they are emitted in convert currency;
- the minimum granted sum is $ 50 million;
- the emission is realized by financial mediators specialized companies or their official representatives;
- euro bonds are freely released on the international markets.
In 1998, the Municipality of Sofia decides to emit a contractual loan. This kind of loan is preferred by the municipal administration for several specific reasons:
1. Lower interest percentage;
2. Insignificant local market liquidity;
3. Presence of the country on international markets.
The combination of all these factors leads to the decision of starting the emission of euro bonds. The man characteristics of the euro bonds are the following:
- there is no need of guarantees for their emission, except for the credit rating of the institution, developed by a world famous credit agency;
- they are emitted in convert currency;
- the minimum granted sum is $ 50 million;
- the emission is realized by financial mediators specialized companies or their official representatives;
- euro bonds are freely released on the international markets.
Practice
Phase I Decision of the Municipal Council:
The Municipal Council decides to emit a contractual loan.
Phase II Announcement of the decision taken and selection of an official loan agent:
The Municipality starts the selection of the lead manager of the operation. The procedure is the following:
- The municipal intentions are officially announced by the Bulgarian National Bank, the Ministry of Finances, on the Internet and other sources;
- The financial institutions react and develop their proposals;
- The Municipality selects the lead manager. It announces two stages of assessment.
Phase III Signing the Mandate Letter and Contract:
After choosing the lead manager of the operation, the Municipality signs the contract. This procedure is preceded by the signing of a Mandate Letter through which the lead manager takes the responsibilities and the organization of the emission.
Phase IV Organization of the emission:
It is very important to have the professional evaluation of the solvency and the rating of the city. This evaluation should be given from a leading rating agency. Standard and Powers begins to prepare the evaluation. The price of this kind of service is very high $40 000. After being approved by the Municipality, this Agency starts detailed investigations and research on the observation of the obligatory requirement of the financial institutions. As a result of the analysis, Standard and Powers determines a B with positive perspective city rating. The credit evaluation is a guarantee for the loan, i.e. there is no need of a state or bank guarantee for the loan, blocking or municipal property mortgage. The determined rating indicates the level of possible risk.
Phase V Signing of emission contracts:
There are negotiations between the juridical consultants of the emitter and the lead manager. The main objective is to achieve full authenticity of the data described in the prospect.
Phase VI Beginning of the procedure:
All required documents are released onto the foreign market, including the prospectus. The selling of the bonds begins.
Phase VII End of the procedure:
On the last day, determined by the contract, the funds obtained from the sale of the stocks are transferred to the current bank account of the Municipality.
Phase I Decision of the Municipal Council:
The Municipal Council decides to emit a contractual loan.
Phase II Announcement of the decision taken and selection of an official loan agent:
The Municipality starts the selection of the lead manager of the operation. The procedure is the following:
- The municipal intentions are officially announced by the Bulgarian National Bank, the Ministry of Finances, on the Internet and other sources;
- The financial institutions react and develop their proposals;
- The Municipality selects the lead manager. It announces two stages of assessment.
Phase III Signing the Mandate Letter and Contract:
After choosing the lead manager of the operation, the Municipality signs the contract. This procedure is preceded by the signing of a Mandate Letter through which the lead manager takes the responsibilities and the organization of the emission.
Phase IV Organization of the emission:
It is very important to have the professional evaluation of the solvency and the rating of the city. This evaluation should be given from a leading rating agency. Standard and Powers begins to prepare the evaluation. The price of this kind of service is very high $40 000. After being approved by the Municipality, this Agency starts detailed investigations and research on the observation of the obligatory requirement of the financial institutions. As a result of the analysis, Standard and Powers determines a B with positive perspective city rating. The credit evaluation is a guarantee for the loan, i.e. there is no need of a state or bank guarantee for the loan, blocking or municipal property mortgage. The determined rating indicates the level of possible risk.
Phase V Signing of emission contracts:
There are negotiations between the juridical consultants of the emitter and the lead manager. The main objective is to achieve full authenticity of the data described in the prospect.
Phase VI Beginning of the procedure:
All required documents are released onto the foreign market, including the prospectus. The selling of the bonds begins.
Phase VII End of the procedure:
On the last day, determined by the contract, the funds obtained from the sale of the stocks are transferred to the current bank account of the Municipality.
Results
On May 12, 1999 the euro bonds of the Municipality of Sofia were successfully sold. As a result of the stock emission the municipality gained about 50 million euro for the 3 year period at an interest of 9.75% over the nominal value of the emission. The municipal bonds were sold at 99.50 for a nominal value of 100, ensured 9.95% income per year for the buyers. The funds management will be realized by the Municipal Bank. The funds from the loan will be used for the improvement of the existing infrastructure of the capital of Bulgaria Sofia. The investment is supposed to attract additional investment activity on the territory of the Municipality, creating direct possibilities for alternative employment. The municipal administration considers that as a result of this initiative, significant social effects will be achieved, which will lead to the improvement of the well being of the citizens of Sofia.
On May 12, 1999 the euro bonds of the Municipality of Sofia were successfully sold. As a result of the stock emission the municipality gained about 50 million euro for the 3 year period at an interest of 9.75% over the nominal value of the emission. The municipal bonds were sold at 99.50 for a nominal value of 100, ensured 9.95% income per year for the buyers. The funds management will be realized by the Municipal Bank. The funds from the loan will be used for the improvement of the existing infrastructure of the capital of Bulgaria Sofia. The investment is supposed to attract additional investment activity on the territory of the Municipality, creating direct possibilities for alternative employment. The municipal administration considers that as a result of this initiative, significant social effects will be achieved, which will lead to the improvement of the well being of the citizens of Sofia.
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