Cities crowd fast-growing muni market
"I think this market is just beginning," said Stanislas Popow, director of Bankers Trust Co.'s Warsaw office. He predicted the market could exceed $300 million in two years.
Following the lead of Gdynia, which in February placed Poland's first municipal bonds, four other cities are now planning debt offerings this year. Together, the five cities could raise more than $150 million in 1996.
Warsaw is leading the pack, after announcing last week that it is planning a $100 million Eurobond issue for a bridge over the Vistula River and water and sewage plants. If successful, the issue would be the first foreign-currency debt offering by a Polish municipality.
Krakow named a lead manager last week for a zl. 15 million ($6 million) issue to be sold in three, zl. 5 million ($2 million) tranches to be placed in coming months.
Lublin and lodz are also joining in, with plans for zl. 15 million ($6 million) and zl. 40 million ($16 million) issues, respectively.
But these possible issues are only the start of the municipal bond craze.
Krakow hopes to raise another zl. 30 million ($12 million) later this year.
Lublin plans to issue another zl. 75 million ($31 million) over the next five years. And Gdynia still has three tranches to go in its zl. 28 million ($12 million) issue.
Cities are hot on the bonds because they are cheaper than bank financing and secure funding for long-term projects that would overburden operating budgets.
lucja Konopka, Warsaw's treasurer, said bonds are about 2% cheaper than bank loans, which usually carry rates of 24%-25%. Warsaw plans to issue the Eurobonds with a five-year maturity. The city will finance them through its zl. 900 million ($375 million) annual operating budget.
A potential cloud on the issue's horizon, however, is that the bonds may have to compete with the National Bank of Poland, which is planning a major sovereign issue later this year. Also, in a possibly disconcerting move for investors, the city is hoping to cut costs by seeking a rating from the company that will manage the issue.
Warsaw plans to open a tender for a lead manager by the end of this month.
Bankers Trust's Popow said the Warsaw issue should be successful. "The appetite is there, the market is there," he said.
As a forerunner, Gdynia's experience bodes well for Warsaw. Gdynia's first two tranches were oversubscribed by 200%. Issued with maturities of one to four years, the bonds are indexed to Polish Treasury bills.
"The bonds offer quite good returns while at the same time the risk is very close to the Treasury risk," said Dariusz Strojewski, a senior officer in the capital markets department at ING Bank, the issue's manager. One-year bonds in the first tranche yielded 21.14 basis points over the 52-week t-bills benchmark, while in the second tranche, sold last week, one-year bonds were at 23.37 basis points over the benchmark. (One hundred basis points equal one percentile.)
Krakow's zl. 15 million ($6 million) offer is also likely to be successful, but shows the market's underdeveloped state. The first zl. 5 million ($2 million) tranche will be handled by a consortium of three Polish banks - Bank Wspolpracy Regionalnej, Bank Przemyslowo-Handlowy and Polska Kasa Opieki SA (Pekao).
The consortium won the tender over Creditanstalt, which offered to sell the issue at 100 basis points above the benchmark, and the ING group, which proposed 137.5 basis points. The winning consortium offered a zero margin above the benchmark.
"It's called a bond because of PR reasons," said ING's Strojewski, who likened the winning consortia's bid to a bank loan. "It's a way of lending money indirectly."
Despite such growing pains, investment bankers expect investors, who have so far socked their money into high-yielding T-bills, will look to municipal bonds to diversify their fixed-income portfolios.
"If you look at the market for T-bills and T-bonds, you will see more investors than issuers," said Cezary Smorszczewski, deputy director of the capital markets department at Pekao, a member of the consortium managing the Krakow issue.
While the current municipal-bond market is small, investment bankers are betting larger cities will increase issue amounts and smaller cities will come to the market.
Bankers Trust, for example, is part of a consortium bidding to lead manage the lodz issue. Popow noted that while managing a zl. 40 million ($17 llion) issue is small by Western standards, it means a foot in the door that could lead to greater payoffs later.
"We will not make any money on this," Popow said. "We believe this is good to demonstrate our capacities and to get involved in this market."
Popow expects there will be room for about five or six large investment banks on the municipal-bond market. The strategy is to start small and make a name for yourself, he said.
Typically, underwriting fees run 1% and 2%, Popow said. In the short-term, this would only mean about $6 million a year in fees for investment bankers. But eventually, as the market grows, so too will fee revenue.
ING's Strojewski added that his bank plans to compete in tenders for all munibonds, no matter how small. "We would be stupid if we would not decide to try to offer our services to other cities as well," he said.
But not every city is looking to jump on the bond bandwagon.
"Wroclaw will not be issuing bonds," said Leontyna Gemza, city treasurer.
"If a city has a good financial situation then bonds are a good idea. If the financial situation is difficult, then you have to consider it carefully. We're considering it carefully."
Gemza said the city's best option is to take preferential credits from the National Environmental Protection Fund.
Poznan is taking the same approach. Maria Waligora, vice director of the city's analysis and controls department, said the city plans to take a zl.
9 million ($3.7 million) loan from the National Environmental Protection Fund to build a central sewage cleaning facility.
Dorota Dabrowski contributed to this article.
Following the lead of Gdynia, which in February placed Poland's first municipal bonds, four other cities are now planning debt offerings this year. Together, the five cities could raise more than $150 million in 1996.
Warsaw is leading the pack, after announcing last week that it is planning a $100 million Eurobond issue for a bridge over the Vistula River and water and sewage plants. If successful, the issue would be the first foreign-currency debt offering by a Polish municipality.
Krakow named a lead manager last week for a zl. 15 million ($6 million) issue to be sold in three, zl. 5 million ($2 million) tranches to be placed in coming months.
Lublin and lodz are also joining in, with plans for zl. 15 million ($6 million) and zl. 40 million ($16 million) issues, respectively.
But these possible issues are only the start of the municipal bond craze.
Krakow hopes to raise another zl. 30 million ($12 million) later this year.
Lublin plans to issue another zl. 75 million ($31 million) over the next five years. And Gdynia still has three tranches to go in its zl. 28 million ($12 million) issue.
Cities are hot on the bonds because they are cheaper than bank financing and secure funding for long-term projects that would overburden operating budgets.
lucja Konopka, Warsaw's treasurer, said bonds are about 2% cheaper than bank loans, which usually carry rates of 24%-25%. Warsaw plans to issue the Eurobonds with a five-year maturity. The city will finance them through its zl. 900 million ($375 million) annual operating budget.
A potential cloud on the issue's horizon, however, is that the bonds may have to compete with the National Bank of Poland, which is planning a major sovereign issue later this year. Also, in a possibly disconcerting move for investors, the city is hoping to cut costs by seeking a rating from the company that will manage the issue.
Warsaw plans to open a tender for a lead manager by the end of this month.
Bankers Trust's Popow said the Warsaw issue should be successful. "The appetite is there, the market is there," he said.
As a forerunner, Gdynia's experience bodes well for Warsaw. Gdynia's first two tranches were oversubscribed by 200%. Issued with maturities of one to four years, the bonds are indexed to Polish Treasury bills.
"The bonds offer quite good returns while at the same time the risk is very close to the Treasury risk," said Dariusz Strojewski, a senior officer in the capital markets department at ING Bank, the issue's manager. One-year bonds in the first tranche yielded 21.14 basis points over the 52-week t-bills benchmark, while in the second tranche, sold last week, one-year bonds were at 23.37 basis points over the benchmark. (One hundred basis points equal one percentile.)
Krakow's zl. 15 million ($6 million) offer is also likely to be successful, but shows the market's underdeveloped state. The first zl. 5 million ($2 million) tranche will be handled by a consortium of three Polish banks - Bank Wspolpracy Regionalnej, Bank Przemyslowo-Handlowy and Polska Kasa Opieki SA (Pekao).
The consortium won the tender over Creditanstalt, which offered to sell the issue at 100 basis points above the benchmark, and the ING group, which proposed 137.5 basis points. The winning consortium offered a zero margin above the benchmark.
"It's called a bond because of PR reasons," said ING's Strojewski, who likened the winning consortia's bid to a bank loan. "It's a way of lending money indirectly."
Despite such growing pains, investment bankers expect investors, who have so far socked their money into high-yielding T-bills, will look to municipal bonds to diversify their fixed-income portfolios.
"If you look at the market for T-bills and T-bonds, you will see more investors than issuers," said Cezary Smorszczewski, deputy director of the capital markets department at Pekao, a member of the consortium managing the Krakow issue.
While the current municipal-bond market is small, investment bankers are betting larger cities will increase issue amounts and smaller cities will come to the market.
Bankers Trust, for example, is part of a consortium bidding to lead manage the lodz issue. Popow noted that while managing a zl. 40 million ($17 llion) issue is small by Western standards, it means a foot in the door that could lead to greater payoffs later.
"We will not make any money on this," Popow said. "We believe this is good to demonstrate our capacities and to get involved in this market."
Popow expects there will be room for about five or six large investment banks on the municipal-bond market. The strategy is to start small and make a name for yourself, he said.
Typically, underwriting fees run 1% and 2%, Popow said. In the short-term, this would only mean about $6 million a year in fees for investment bankers. But eventually, as the market grows, so too will fee revenue.
ING's Strojewski added that his bank plans to compete in tenders for all munibonds, no matter how small. "We would be stupid if we would not decide to try to offer our services to other cities as well," he said.
But not every city is looking to jump on the bond bandwagon.
"Wroclaw will not be issuing bonds," said Leontyna Gemza, city treasurer.
"If a city has a good financial situation then bonds are a good idea. If the financial situation is difficult, then you have to consider it carefully. We're considering it carefully."
Gemza said the city's best option is to take preferential credits from the National Environmental Protection Fund.
Poznan is taking the same approach. Maria Waligora, vice director of the city's analysis and controls department, said the city plans to take a zl.
9 million ($3.7 million) loan from the National Environmental Protection Fund to build a central sewage cleaning facility.
Dorota Dabrowski contributed to this article.
