At its face value, bond flotation is good. Government finance managers find it as a new means of getting alternative sources to fund development projects for usually cash-strapped local government units as against the usual route of borrowing from banks and financial institutions. Embarking on bond flotation is looked upon as a step in strengthening devolution and autonomy of IRA-dependent LGUs.
Municipal or city bond flotation started in the country in the early 90s but this financing mode is still considered an unknown babe-in-the-wood in the financing industry owing to many constraints. Chief among which is the lack of awareness and knowledge of the general public as well as potential bond investors or buyers on the bond flotation scheme itself, which caused for the failure of many municipal bond floats to attract bond buyers or investors. The LGUs are high-risk, highly political entities that not yet relied upon by individual investors from the public no matter how they dangled their IRAs as sinking fund repayments or put at greater risk the delivery of basic social services once the bond float cage is put over their IRAs.
The reported buy-back made by a Bukidnon LGU which resorted to bank borrowing just to stop the further bleeding of its coffers due to unnecessary obligations and charges attendant to bond flotation is a sorry spectacle that Nabunturan officials pushing for the same bond float experiment ought to dread and evade. The reported emptiness of occupancy in the new public market of Calatagan, Batangas where a bond float was made ought not to be repeated in the Nabunturan where its officials want to construct the same type of infrastructure that pegs high rentals of stalls and spaces and advances.
The best scenario for the municipal bond flotation is if its total amount of bonds floated is bought completely by the first-level individual buyers. Which means that funds have been sourced out enough to complete the intended project. In this case the LGU, would only have to bear for the interest charges to be added to the principal amount which would be repaid on term.
But what would be fatal to the municipal coffers is when there is nobody or there are only a few first-level individual bond buyers, or the bonds are bought in bulk through the waiting underwriter (ahente) as in the painful cases in Claveria, Misamis Oriental and Aklan. It is the underwriter that exacts more tong-pats- additional variable fees and charges including hidden charges and conditionalities on top of the interests on bonds for saving faces of LGU officials. Certainly, there is lucrative business in here, that underwriters and brokers including the orchestrating LGU financial advisers and consultants have discovered, and it is spawned by the failure to attract bond investors or buyers, a reality that has practically hounded a many municipal bond floats in the country.
Where bank borrowing exacts only a few known charges, fees and fixed interest that are not difficult to project in the yearly budget pipelining, bond flotation on the other hand exact variable, unknown charges, fees and floating interest, plus the other fees and expenditures that are first borne during the preparatory, pre-construction period.
If you would not call expensive, exorbitant and unnecessary the P6.7 million cost for architectural and engineering design, the P2.7 million consultancy fee, the P1.35 million underwriter fee, P900,000 guarantee fee, P450,000 trustee fee and other expenditure items in Nabunturan bond flotation scheme, I don’t know what they are. Needless to say, these are completely unnecessary if the Nabunturan LGU resorts only to bank borrowing and taps its own departments in doing preparatory activities such as the making of feasibility study, architectural and engineering design, among others. (For online edition, visit my blog: http://cha4t.wordpress.com)
There are two types of municipal bonds. The first are called general obligation (GO for short), and are backed by the issuer's ability to tax. General obligation bonds are issued to pay for projects such schools and sewer systems. Most investors consider general obligation bonds safer than their revenue counterparts; this is a misconception. This is considered to be the best way to invest money as they are tax free.
How bonds work? Companies and governments issue bonds to fund their day-to-day operations or to finance specific projects. When you buy a bond, you are loaning your money for a certain period of time to the issuer. In return, bond holders get back the loan amount plus interest payments.
There are two types of municipal bonds. The first are called general obligation (GO for short), and are backed by the issuer's ability to tax. General obligation bonds are issued to pay for projects such schools and sewer systems. Most investors consider general obligation bonds safer than their revenue counterparts; this is a misconception. This is considered to be the best way to invest money as they are tax free.