The EBRD has invested in the City of Bucharest’s (“City”) recent RON 2.2 billion Bond Programme, according to a bank statement.
The Bank has been extremely active in supporting the development of Romania’s capital markets, and has been an investor in several local currency bonds. The Bucharest bond is seen as ground breaking as it is the first local-currency bond issuance programme of the City and the first large scale publicly traded municipal bond listed on the Bucharest Stock Exchange.
As the Bond Programme consists of four roughly equal tranches of 3, 5, 7 and 10 year bonds, successful issuance creates a domestic yield curve for the City.
The local currency bond programme mitigates forex and devaluation risk by switching its long-term funding from foreign to local currency and will also assist in building a capital market yield curve for municipalities.
In the build up to the bond, the EBRD was involved in policy dialogue to support clearing and settlement reform. EBRD focused its support on the longer tenors where it envisaged demand would be weaker.
Transition Impact
The EBRD’s investment was in line with the objectives of its Local Currency and Local Capital Market Development Initiative to promote the development of capital markets in countries where the Bank invests.
Transition for the project is derived from:
Development of the domestic municipal bond market. Domestic capital markets are an important way for municipalities to raise financing for critical investment projects. The Bond Programme will result in a well-structured capital markets instrument which should provide liquidity to the market. It would also create a pricing benchmark, though the creation of a benchmark yield curve, enabling both the City and investors to examine how the market prices municipal risk, having positive follow-on effects for other large cities and non-sovereigns in Romania.
The bond’s strong demonstration effect: As the largest publicly listed municipal bond issuance in Romania with multiple tranches, the bond will create a yield curve, which will have an important demonstration effect for other potential municipal borrowers in both Romania and the region. It will also set benchmarks for market based financing in long tenors.
Setting standards: To strengthen demand both domestically and internationally, the Bank is engaged in ongoing policy dialogue to promote clearing and settlement reform as well as repo-eligibility. The Bucharest bond benefits from settlement through Clearstream, which is a first for the market.
Expected transition impact rating: ETI score: 60
The Client
The Municipality of Bucharest is the capital and largest city of Romania, with around 1.9 million inhabitants, split into six sectors, each with its own administrative body. It is also the political and economic hub of the country, being home to the legislative body and generating over 20 per cent of the country’s GDP, with local GDP more than twice that of the national average.
Bucharest is rated BBB-/Stable by Fitch as a long-term foreign currency issuer, BBB/Stable as a long-term local currency issuer.
EBRD Finance: RON 333 million bond subscription (~€75 million)
Project Cost: RON 2.2 billion (~€500 million)
Environmental and social categorisation, impact, and mitigation
The proceeds of the new Bond issues will be used to refinance the City of Bucharest’s existing Eurobond, and will not be used to finance any specific investment projects, physical assets or activities, or new capital expenditure. In accordance with the Bank’s Environmental and Social Policy provisions for general corporate finance, the environmental and social due diligence (“ESDD”) was focussed on assessing the risks and impacts inherent to the business sectors in which the City operates as well as the client’s environmental and social management systems and capacity to implement the its operations in accordance with the Performance Requirements (“PRs”). The ESDD also reviewed the City’s performance and management of environmental and social issues in the Bank’s previous transactions with the City and its subsidiaries. However, due to the nature, rules and limited timeframe of capital market transactions, the Bank was not able to review the current compliance of the City and subsidiaries with the PRs.
The limited ESDD concluded that the City has the capacity to implement the Bank's Performance Requirements. The City‘s operational activities involves municipal services (road rehabilitation, parking, traffic management and supporting investments in municipally-owned entities in the district heating and transport sectors), which typically aim at providing environmental and social benefits and improvements. Any adverse impacts can be mitigated or prevented by adhering to good planning, management and construction practices. Some sustainability challenges may arise from time to time due to the projects being carried out in densely populated urban areas. However, the ESDD concluded that material environmental and social risk associated with the City’s operations and investment programmes is low, given that all of its operations are regulated by the Romanian Competent Authorities who are implementing EU environmental and social policies, laws and standards.
The City agreed to maintain its corporate environmental and social management systems and carry out its operations and investment activities in compliance with the Bank’s Performance Requirements as well as to provide the Bank with annual environmental and social reports on its performance, operations and investment activities.
Technical Cooperation
The Bank plans to mobilise grant-based funding to help the City strengthen its financial reporting and asset-liability management capabilities. This assistance will benefit the City by allowing it to better match asset financing with respective funding sources. Enhanced financial reporting will benefit all stakeholders. The cost of the assignment is expected to be up to €75,000 and would be financed by an international donor, a multi-donor fund or the EBRD Shareholder Special Fund.
