1. The establishment of a funding strategy for your Municipality

2. Outline of presentation
Municipal
borrowing
requirements
Municipal
debt absorption
capacity
Guiding principles
Investors
market
Interest rate
environment

3. Municipal borrowing requirements
Convert to cash based approached
03/04
Current
04/05
05/06
06/07
07/08
Total Operating Income
(Total Operating Expenditure)
Change in Working Capital
Non cash adjustment
Cash Operating Surplus/(Deficit)
Net Interest
Cash retained after Interest
Capital redemption
Cash retained before capital movements
Net Capital Movement
Balance before financing
Financing
Net change in cash and investments
Cash and investment balance
Determine multi-year requirements from capital budget
Billed income
Expenditure incl
non cash items
Change in
debtors, creditors
& stock
Non cash
items in income
& expenditure
Determine cash flow surplus (funding from own revenue)
Real cash
available
Interest earned
Min Interest paid
Determine capital grants
Determine the required cash & investment balance
Own cash
available for
capex
Capital grants
Min Capex
Borrowing requirement to be funded through external loans

4. Municipal debt absorption capacity
Unfortunately; limit to borrowings
Debt absorption capacity:
Indicators
Debt to income < 50%
External interest/ Total operating expenditure < 7,5%
Net cash flow/external interest > 1X
Debt requirements should be limited to absorption capacity

5. Interest rate environment
Short-term outlook:
SARB Monitory Committee Meeting
Strong Rand
Drought
Credit demand
Long-term outlook
International Economy
Where in the cycle are we?

6. R157 yield curve

7. R157 yield curve

8. Interest rate environment - continued
Fixed or floating rate
Holding/carry cost of funds
Municipality’s average cost of funding

9. Investors Market Traditional investors: New investors:
DBSA (50 – 55% market share)
ABSA (total banking sector 20 – 10% market share)
INCA (30 – 35% market share)
New investors:
Investec
FirstRand
SCMB
Nedbank
Barclays
Future investors : institutional investors
: (the Joburg Bond)

10. Guiding principles Utilise a multi-year approach
Target banks and investors
Enhance profile through pro-active interaction
Make use of funding with a term longer than 10 years
Obtain facilities without incurring commitment fees
Meet the requirements of the Municipal Finance Management Act

11. Recommendation for a funding strategy
Take a multi-year funding strategy to Council for approval
Combine the strategy with a view on the interest rate environment
Consider carefully which investors to approach

12. CONCLUSION
Do not time the market, your task is to provide funding on a sustainable basis and to lower the average cost of funding.
You are welcome to contact INCA for assistance and guidance.