DA-led Tshwane forced to cancel bond issue

• City fails to comply with process required by auditor-general • Received bids worth R2.1bn

The DA-led City of Tshwane has botched an opportunity to alleviate tough financial conditions at the South African capital with a planned bond auction last Tuesday following a procedural error.

Tshwane was forced to cancel its first bond auction in five years, with bids amounting to about R2.1bn, after it failed to comply with processes required by the auditor-general.

The city had said that it would use the funds it intended to raise to finance capital expenditure, although details were not disclosed.

After the city went to market, the auditor-general’s office refused to issue a “letter of comfort”, which would have allowed the auction’s completion. A letter of comfort provides a level of assurance that an obligation would ultimately be met.

The DA, which leads the city’s coalition local government, boasts in its policy documents and manifestos that it is capable of better governance and a strict adherence to processes. This apparently was not followed in this case. The cancellation of the bond auction, however, is the direct result of noncompliance with the auditor-general’s requirements.

The DA-led government in the metro inherited a municipality which had a budget deficit of more than R2bn.

The party now says it has turned around and stabilised the city’s finances.

The ANC lost its majority in the city in the 2016 local government elections.

Tshwane’s foray into the market was intended to raise a 10-year bond of R1bn at a pricing of 180 basis points more than the benchmark R186 government bond.

On Thursday last week, the city said the auction had been a success, but the bonds, priced at 10.725% a year and taken up by 11 bidders, were not issued.

Business Day understands that not all the documents which were needed for the letter of comfort to be issued, were submitted on time.

When municipalities wish to incur long-term debt, they are required to adhere to section 46 of the Municipal Finance Management Act.

Tshwane city manager Moeketsi Mosola, who is the

accounting officer in the metro, said on Monday that “the successful bond placement by the City of Tshwane was cancelled due to process requirements by the office of the auditor-general of SA, which could not be concluded in time, and it has nothing whatsoever to do with the financial position of the city”.

He said the city was considering its options and would issue a statement about when it intended to go back to the bond market.

The office of the auditor-general said it would only comment on Tuesday.

After the June 26 auction, the city jubilantly declared that investors were in a “stampede” for the city’s bonds, after 11 investors submitted bids amounting to R2.102bn — well in excess of the required R1bn.

Mare-Lise Fourie, Tshwane’s finance member of the mayoral committee, said two days after the auction that the city was “delighted” by the response from investors and the positive market sentiment. She said that it was boosted by ratings agency Moody’s review of the city’s long-term rating outlook in March 2018, from negative to stable.

Fourie said the city had always made it clear through their lead managers, Absa Corporate and Investment Banking that Tshwane was implementing strategies of cutting costs and revenue enhancement in line with its plan to achieve financial sustainability.

“With this resounding success in the capital markets, Tshwane has demonstrated its commitment to turning around its financial situation and placing its financial sustainability on a solid growth path,” she said.

However, her comments came after a Sens announcement released the day of the auction giving an indication that all was not well.

According to the Sens announcement, the auditorgeneral, the city’s statutory auditor, confirmed that “this issue of notes issued under the programme will not comply in all respects with the relevant provisions of the commercial paper regulations”.

As auditor, the auditor-general determines the desirability of the paper.

The auction was cancelled a few days later after the auditorgeneral refused to issue the letter of comfort.

THE CITY WOULD ISSUE A STATEMENT ABOUT WHEN IT INTENDED TO GO BACK TO THE BOND MARKET