The need for municipal bonds is very…

The need for municipal bonds is very high in the market, given that local authorities need financing, and this instrument can provide the funds for the co-financing of some investments with European funds, says Valentin Miron, co-founder of VMB Partners, a company that consulted 27 of the 35 municipal issues present at BVB.

“We still have several large town halls in the pipeline, including sectors from Bucharest, and we want to go to the regional water operators, which are mini-Hydroelectrics. They are very profitable, very powerful, but unfortunately they cannot issue bonds at present. When we solve the legislative problems with the Ministry of Finance, with the ASF, things will go better. It is about a potential of 300-700 million euros per year for new issuers, looking at water operators and territorial administrative units”, said Valentin Miron during the ZF Capital Market Summit 2024 conference.

The first green municipal bonds on the local capital market, issued by the Municipality of Reşita, debuted at the beginning of March BVB. The issue has a value of 8.8 million euros and a maturity of ten years. The listing was made following a private placement in November 2023, during which the municipality attracted 8.8 million euros.

Apart from Resita, 15 other cities and 5 counties in Romania currently have bonds listed on the BSE. It is about the counties of Alba, Bihor, Cluj, Hunedoara, Timiș and the cities: Alba Iulia, Bacău, Bistriţa, Bucharest, Focşani, Iaşi, Năvodari, Oraviţa, Orăştie, Predeal, Siret, Slobozia, Târgu Mureş, Timișoara, Zalău.

The municipal bond sector is currently held in check by a legislative provision that imposes a 30% drawdown ceiling set by Finance for any town hall, any local council. “It is an outdated ceiling, a ceiling invented in the 2008 crisis, and which prevents the development of infrastructure”. According to VMB Partners, a town hall cannot take out loans that generate a total of repayments and interest payments higher than 30% of its total income.

Another factor that slows down the development of the municipal bond market is the low level of financial knowledge of many mayors, who do not have enough information about options, maturities or financial instruments and do not trust the capital market, preferring to take bank loans.

“For their part, investors are circumspect when they don’t have the financial balance they want, when they don’t have EBIDTA and can’t calculate certain indicators. Investors are interested, but town halls do not make provisions for investments, they are elements of operational expenses that are not understood at the company level but by an outdated accounting system. And this generates reluctance”.

Despite these limitations, Valentin Miron emphasizes that the interest in municipal bonds is very high from the issuers and there are signs that the interest of investors will become equally high. “We are talking about maturities similar to those offered by banking products, about necessary investments in infrastructure”.

According to VMB Partners, town halls cannot issue bonds for very large amounts, as there are thresholds set by the Ministry of Finance. “A debt refinancing package plus investments could reach 100-150 million euros”, said Valentin Miron.