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The Ekurhuleni Metropolitan Municipality (EMM) on 13 May 2013 successfully placed a R800 million 15 year amortising bond, EMM04.
 
EMM, a regular issuer in the local debt capital market has over the past 3 years established itself amongst the South African institutional investor market having issued over R2.4 billion in bullet profile bonds with maturities ranging from 10 years to 12 years.
 
As with a number of local municipalities, EMM adopted a policy of establishing sinking funds to cater for the redemption of these bullet profile instruments wherein the issuer (EMM) makes periodic deposits into the independently managed fund sufficient to yield the required amount to service the principal and coupon obligations under the bond.
 
Given the negative variance between borrowing rates and deposit rates, these sinking funds, which essentially mimic an amortising profile instrument from a cash flow perspective, result in a negative carry from the issuer’s perspective.  Ideally the issuer in such instances should issue an amortising bond, which then alleviates the need to establish a sinking fund. This ground-breaking transaction should see other municipalities also taking advantage of the capital relief and issuing amortising bonds.
 
Although amortising bonds are somewhat uncommon in the local bond market, they are a well-entrenched product in the bank loan market. In order to test the market’s appetite for an amortising bond, EMM offered investors both a 15 year bullet profile bond and a 15 year amortising profile bond with semi-annual equal capital repayments. The bond offering was well supported receiving over R2 billion in bids from 15 different investors, with almost R1.2 billion of bids towards the amortising bond -at an average weighted spread below the published price guidance.
 
Given the tremendous interest in the amortising instrument, EMM decided to only issue the amortising instrument which priced at 1.8% over the relevant government bond. The proceeds will be used by the municipality to fund its capital infrastructure programme.
“As a municipality we are  very pleased with the outcome of this ground breaking successful issuance of a R800 million amortising bond. This success could not be achieved without the close professional working relationship between the team from EMM and the   arrangers, Rand Merchant Bank and Basis Points Capital. All the municipalities in South Africa have issued bonds with bullet profiles but the arrangers and investors showed confidence in EMM’s ability to successfully issue a 15 year  amortising bond,” explains Ekurhuleni’s acting chief financial officer Andile Mahlalutye.
 
Rand Merchant Bank and Basis Points Capital acted as joint lead arrangers on this issuance.