Municipal Bonds Raise Development Funds for Ukraine’s Cities
Ukraine’s cities need massive amounts of investment to modernize their infrastructure, and municipal bonds provide the means to help them attract long-term capital. In late 2004, the USAID-funded Access to Credit Initiative (ATCI) began working with selected cities to demonstrate just how municipal bonds work. ATCI selected four cities, Ivano-Frankivsk, Berdyansk, Lviv and Luhansk, it would assist in issuing pilot bonds.
While preparing the cities for bond issuance, ATCI studied each city's fiscal environment and the legal framework governing bond issuance, as well as its past borrowing history. This process included a credit evaluation, securing a rating, obtaining regulatory approvals, registering the issue, placing it and listing it for secondary trade.
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| An aerial view of Lviv’s historic Market Square |
ATCI began working in Lviv in November 2006 and is now close to completing a UAH 92 million bond issuance. It assisted the Lviv City Council prepare for its bond issue by helping the city determine its investment priorities, prepare for and facilitate a credit rating for the city and the issue, structure the issue, and prepare the necessary documentation to obtain borrowing approval from the Ministry of Finance. It then drafted the tender documents and advised on the competitive process necessary to select an underwriter. Finally, ATCI prepared the necessary documents to register the issue with the Securities and Stock Market State Commission.
The bond has been assigned a B+ /stable/ rating by Standard & Poor’s International Rating Agency on the global scale and uaA+ on the national scale. On July 20, 2007, Lviv Bank, the underwriter and paying agent of the issue, placed the first series of the municipal bond in the amount of UAH 50 million for five years at 9.45 percent—the lowest interest rate since inception of Ukraine’s municipal bond market. A group of Icelandic based companies invested in 99 percent of the bonds, and Lviv Bank purchased the remaining one percent. Issuance of the second series of the UAH 42 million bond is scheduled for October–November 2007.
The proceeds of the UAH 92 million bond will be used for road improvements, energy-saving measures, street lighting reconstruction, and development and reconstruction of housing and municipal utilities in Lviv.
In 2006, the city of Ivano-Frankivsk had issued a municipal bond in the amount of UAH 5.5 million. The city of Berdyansk is planning an issue for UAH 10 million in late 2007, as is the City of Luhansk.
These pilot bond issues will have a powerful impact and demonstrate to cities nationwide that Ukrainian bond investors are prepared to make long-term capital available to well-managed cities. To develop a stable financial pool for municipal bonds, ATCI is working with the Government of Ukraine to create a specialized independent financial institution, the Municipal Finance Facility, which would act as a conduit for liquidity between cities and the capital markets.
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