Second Wroclaw munibond issue to finance housing
Following its successful municipal bond drive two years ago, the city of Wroclaw last week finalized plans with Bank Zachodni to launch a second issue, scheduled to get off the ground late this summer.
With its eye to raising zl. 25 million ($6 million) to build new public housing, this most recent program will bring a total of zl. 75 million ($17.8 million) raised through municipal bond issues.
"This is an excellent way of raising funds," said Bogdan Zdrojewski, mayor of Wroclaw. "The money will cover 75% of the costs to build 300 new apartments, which are scheduled to be completed by 2001."
While municipal bonds have proven to be a useful tool for Wroclaw, such bond offerings have yet to develop the country's municipal debt market, which is still characterized by small-scale, largely private issues. At present, cities usually first try to finance public projects through public assistance funds such as the National Environment Fund. When these sources begin to dry up, however, cities have to look to more savvy financial instruments to raise funds needed for city improvements. That means that the municipal bond market will likely start taking off in coming years, analysts said.
"When these sources aren't available to cities any longer, they will have to look for other commercial sources," said Piotr Pryfer, head of the securities department at Kredyt Bank.
Marcin Swiecicki, from the investment banking department at Powszechna Kasa Oszczednosci Bank Polski (PKO BP), agreed. "For sure it will develop more rapidly," he said.
As it stands now, the country's municipal bond market is largely the domain of domestic banks. Partly because of the relatively small amounts of money involved in the transaction, international banks have yet to be active in such issues. PKO BP is one of the leaders in the munibond market in Poland. To date the bank has been the agent in 21 municipal bond drives totaling zl. 110 million ($26 million). While that bank heads the pack in terms of number of issues, Bank Pekao leads in total issue value. It has engineered 12 municipal bond issues valued at close to zl. 400 million ($95 million).
Wroclaw's upcoming issue is the sixth one organized by Bank Zachodni. The total value of all issues to date exceeds zl. 100 million ($23.8 million).
Aimed at sparking the development of new housing in the city, Wroclaw's second issue will look to raise zl. 25 million. This is considerably less than the zl. 50 million ($12.5 million) the city raised last year to fund road improvements.
But the upcoming drive, although smaller, is expected to be crafted along the lines of more traditional bond issues and will be less convoluted than the previous issue.
In the issue two years ago, all the bonds were purchased by Bank Zachodni. Securing the bonds and ultimately repaying the principal on the debt was done through the sale of city-owned housing. Renters were given the option of buying their apartment at a 60% discount to the appraised value. But instead of paying cash, the buyer purchased the equivalent of the apartment's sale price in certificates of deposits (CDs) at Bank Zachodni. To retrieve the apartment, the person handed the CDs over to the city. The city in turn paid back its debt to the bank by handing in CDs.
The bank made money in a variety of ways. First, it received 9% interest on the bonds while paying only 7% on the CDs. However, the CDs made Bank Zachodni far more money through a 6% transaction fee.
"It was a great deal for the bank and the city," said Lidia Wietrzynska, a spokeswoman for Bank Zachodni. "The city sped up the privatization of its property and suddenly there was movement in the local (real estate) market."
In a more traditional municipal bond issue, an investor makes money through the interest paid on the bond, which would likely be at a slight premium to the rate the government pays on treasury bills or bonds. The 1998 Wroclaw issue, in essence, was more like bridge financing.
The issue this year will be more straightforward. First, it will be a public issue open to anyone who wants to participate in the program. Purchasers of the bonds will most likely be residents of city-owned housing looking to purchase apartments at a discount. Instead of paying cash, buyers will purchase the equivalent of the apartment's sale price in bonds. The city in turn will pay back its debt to the bank by handing in the bonds.
The city council has yet to establish the level of discount the city will offer buyers to the appraised price. However, Wroclaw officials hinted last week that the discount will probably be set at 60%.
Linking the bond issue with the privatization of public housing is a key issue for the city of Wroclaw. With 60,000 public apartments still in city hands, the burden of modernizing and maintaining these properties costs the city zl. 48 million ($11.4 million) a year, said Andrzej Jaroch, Wroclaw's deputy mayor in charge of real estate.
On this transaction, Bank Zachodni will make money mainly through a commission paid by the city of Wroclaw.
"The city will pay a commission for the preparation of the (bond issue) program," Kus said. He would not reveal the amount of commission the city will pay the bank.
