Cape Town Plans Return to Debt Market After Six-Year Absence

  • City may raise as much as 5.2 billion rand in three years
  • Government likely to cut budget allocations to municipalities

The City of Cape Town, one of South Africa’s two top-rated municipalities at Moody’s Investor Service, may return to the bond market after a six-year break to raise money for infrastructure projects.

The city plans to raise as much as 2.2 billion rand ($140 million) in the 2016/17 fiscal year, which starts on June 1, and another 3 billion rand over the next two years, Deputy Mayor Ian Neilson said in an e-mailed response to questions. The city will raise the money in bond or loan markets, or both, and the debt will have maturities of 15 years, he said.

Cape Town last sold bonds in 2010, when it issued 2 billion rand of 15-year securities with a coupon of 11.16 percent. Its net debt fell to 17 percent of operating revenue in 2015, from 21 percent the previous year, according to Moody’s Investors Service, which rates the bonds A1.za, the fifth-highest investment-grade level. “Robust” cash flows would enable the city to finance more than half of its 16.9 billion rand of capital expenditure over the next three fiscal years using its own revenue, Moody’s said on Feb. 12.

‘Comfortable Buying’

“Cape Town, from a financial-stability perspective and strength of credit metrics compared to other municipalities, is certainly superior,” Bronwyn Blood, a portfolio manager at Rand Merchant Insurance Holdings Ltd., said by phone from Cape Town on Tuesday. “We’d definitely feel comfortable with buying some of that debt.”

The new debt may price “slightly higher” than previous issues as rising yields have widened corporate credit spreads over government bonds, she said.

Municipal bond sales have dwindled in South Africa in recent years, dropping to 780 million rand in 2015, the lowest level since 2009, with only the Ekurhuleni Metropolitan Municipality selling debt even as the National Treasury tried to encourage cities to raise their own borrowing. Cuts in central-government allocations to municipalities may result in an increase in bond issuance, Blood said.

“I don’t think from a debt-to-revenue perspective any of them are at worrying levels,” Blood said, referring to cities that may issue debt. “I think it’s just a matter of them potentially not spending as they should have on capital expenditure.”

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