BY

EMMANUEL MUGIRANEZA PUBLIC RELATIONS OFFICER

CMA

CASE STUDY ON: MUNICIPAL BOND ISSUE, AN ALTERNATIVE

SOURCE FOR FUNDING LED

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Usual Source of funding LED

Official development assistance,

Central government transfers to local government,

Central government soft-credit facilities

“Pay as you go” financing from both central and local sources.

Official development assistance has fallen over time,

Central governments are under pressure to improve fiscal balance by reducing central budget expenditures,

Pay-as-you-go schemes not only restrict critical current expenditures but also simultaneously fail to raise sufficient capital for major investment projects

Funding sources These sources are no longer adequate

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Local Taxes

Districts also fulfill their obligations using the taxes collected.

However, taxes collected by Districts are periodic and in small amounts compared to development projects needs to be implemented.

Local Taxes Challenge

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Alternative Source of Funding: Municipal Bond

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Detail of the offer

Issuer: City of Kigali Rating: B+(International Credit Rating

Agency) Lead Transaction Advisor: XYZ Ltd Status of the Notes: Senior Unsecured Use of proceeds: Real Estate development Issue amount: 20billion Currency: Rwandan Franc Tenor: 10 years Maturity date: 9 September 2023

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Cont.

Coupon payment dates: Semi-annual payments in January and July

Coupon rate: 13% Fixed Redemption price: 100.00% Issue price: 97.2% Fees: 0.10% Gross proceeds: Rwf 20billion Net Proceeds: Rwf 20 billion Coupon convention: 30/360 Semi Annual

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Cont.

Receiving Bank: International Bank S.A Listing: Rwanda Stock Exchange Denomination/increment: Rwf 1m and

multiples 100k Documentation: Final prospectus dated

22nd August 2013 Governing Law: Rwandan Law Form of Notes: CSD electronic Steps in Municipal Bond issuance

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Project identification

The City of Kigali has identified the need to develop apartments for middle income earners in Muhima Sector.

It will take 2years to build them and from their completion tenants will be paying rent on a monthly basis which will be enough to pay bondholders coupons.

The City council has approved the project and the city has completed the expropriation process. Kigali city is in possession of the land titles.

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Cont.

ABC construction group won the tender to build the apartments.

The city’s efficiency in collecting property tax is at 70% but plans to reach 90% of the efficiency in 4 years.

The city has established a committee of 5 people from different sectors (Engineers, accountant, lawyer, private sector), specifically responsible for the implementation of the project.

It has been identified that Rwf 10billion will be spent in the 1st year of operation and 100% by the end of the 2nd year.

Since the project will start earning revenues in two years from operation, the city will be using money from property tax to pay the coupons on semi-annual basis.

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Special Purpose Vehicle

For effective management of the project, the City has identified the need to open an escrow account to be monitored by an SPV responsible for collecting rent from tenants and servicing the loan and implement the project.

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Size of the issue

The identified project will cost the City Rwf 20 billion and the city has decided to raise that amount through capital market by issuing a municipal bond.

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Credit rating

To enhance the marketability of the bond, though this is not a requirement in Rwanda, Kigali City decided to seek a rating to assess its credit worthiness.

It is also important to note that the same issuer can be given different ratings as it is in essence the security which is rated as for some securities there is a guarantee provided which lowers their riskiness).

International Credit Rating Agency was selected to do it, though S&P( Standard & Poor) and Fitch had manifested their interest in providing the rating. Kigali City was rated B+.

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Identification of the Lead transaction advisor

To appoint the transaction advisors, public tender process is used.

May be one the licencees of the capital market Authority

John and Associates was appointed as the lawyer, DX Co was appointed as the reporting accountant, Peter and Sons Ltd as the auditor, International Bank S.A as the receiving bank, Flower ltd as the marketing company (promoter), BNR will be the registrar.

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Cont.

After due diligence conducted by the lead transaction advisor, Kigali City was advised to issue a 10 year municipal bond,

With a face value of Rwf 20 billion, Where coupons will be paid semi-annually. Based on the current bonds market, it is estimated that

the coupon rate will be in a range of 12%-14%. The lead transaction advisor agreed to provide the draft

prospectus by 15th July 2013. It is estimated that by 22nd August 2013 the prospectus will

be approved by CMA. The pricing date is planned on 26th August 2013 followed by

a subscription period of 2 weeks ending on 6th September 2013.

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Drafting the prospectus:

The transaction advisor provided the draft of the prospectus on 15th August 2013.

As the prospectus (offer document) will be used to provide all the relevant information the investors need to make a decision on whether to invest in the bond or not.

It will be containing information on the economy at large, the risk involved by investing in the issued bond, financial status of the city (issuer), members of the city council, and all other information necessary to help the investors make informed decision.

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Seeking CMA approval of the prospectus

CMA approves the prospectus and a go ahead to publish the prospectus to the public.

Local Government are exempted to pay an approval fee.

However they pay an initial listing fee of Rwf 10 million (0.05% of the issue size) to the Rwanda Stock Exchange and the same

They will pay an annual listing fee for the subsequent year on the market.

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Publication of the prospectus and the offer period

the City of Kigali decided to print 500 copies ( example)

A copy of the prospectus published on its website. Given the size of the offer document, the City decided

to prepare a summary of the document in Kinyarwanda and English for ease of reference for investors.

On 23rd August, the marketing team started the road shows around the country,

One on one meetings, visit to different institutions, programs on TV and Radios, billboards to reach the largest number of investors.

Pricing the issue was done on 30th August 2013 and it was communicated that the offer period ends on 6th September 2013.

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Subscription to the offer by the public

Investors were requested to deposit the money equivalent to the amount of the bond subscribed for in the account No.11111111 open at International Bank S.A .

Investors in the region were asked to deposit the money equivalent to the Rwandan franc amount of the bonds they want to subscribe for in the account No 2222222 open at Kilimanjaro bank which is regional bank.

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Allotment process

At the end of the allotment period, the registrar allotted the bonds to investors and results were communicated to bondholders by email and SMS on 9th September 2013.

The bond was subscribed for at a level of 150%, and the investors were refunded the money of the bond not allotted.

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Listing on Rwanda Stock Exchange

The city of Kigali had applied to list its bond on RSE and the application was successful.

The Kigali City bond started trading on RSE on 10th September 2013.

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RECAP

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Municipal Bond

BONDBorrower: Kigali CityLender: ABC, XYZ, KNX, etcPrincipal: 10 BillionMaturity: 1st October 2015Interest/Coupon: 12% per annum

Today Y1 Y2 Y3 Y4 Y5

Principal and InterestInterest Interest Interest InterestPrincipal

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