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Sovereign Debt Management Forum
Breakout Session 2
World Bank meeting, Washington 24-25 October 2018
Ulf Bengtsson, Director, Kommuninvest
2
Agenda
• Regional and local sector in Sweden
• Kommuninvest’s role & set-up
• Local government borrowing needs &
Kommuninvest’s lending
• Funding and Green loans & Green bonds
• Follow-up of members & risk management
• Relations to Central level
Regional and Local sector in Sweden
4
Central government 30% of public sector spending
Structure of public sector spendingLocal governments are responsible for the core of the citizens welfare system
• Childcare and schooling for children
and young people
• Healthcare and care of elderly and
disabled
• Municipal housing
• Law, order and security
• Sanitation and waste management
• Energy supply
• Water supply and sewage
• Construction issues
Local governments 70% of public sector spending
• Laws and ordinances
• Judicial system
• Defence & security
• Environment
• Higher education and research
• Transport infrastructure
• Rural affairs, animals and food
• Migration and integration
• National economy and budget
• Pensions
5
Strong institutional arrangement
Balanced budget
requirement
Annual local government budgets
should normally be in balance,
imbalances must be restored
within 3 years.
Law:
“Kommunallagen chap. 8 §4-5
(1991:900)”
Financial equalisation
Imbalances between local
governments are equalised
annually through income and cost
equalisation schemes.
Law: “Lagen (2004:773)
om kommunalekonomisk utjämning”
Requirement for sound
financial management
Local governments must work
according to a sound financial
management.
Law:
“Kommunallagen chap. 8 §1-2
(1991:900)”
Local government
financing principle
If the government alters the tasks
of local governments, the
government must also neutralise
their financial effect.
Approved by the government and in
force since 1993.
Financial prudence explains Sweden’s strong public finances
and low levels of public debt
According to the Swedish Bankruptcy Act a local government cannot be declared bankrupt since they do not fulfil
the criteria of being insolvent. This is due to the fact that the local governments have the constitutional right to levy
taxes. The Swedish Court has stated that the local governments in Sweden are not covered by the Bankruptcy Act.
(RH 1996:75) This view is supported by the Swedish legal doctrine.
Kommuninvest’s role & set-up
7
Swedish Local Government Debt Office
• Founded 1986 by ten local governments. Currently 288
owners/members (total=310), of which 277 municipalities
and 11 county councils/regions.
• AAA/Aaa, stable outlook. (Moody’s & S&P)
• Balance sheet Q3 2018: SEK 403bn
• Lending portf. Q3 2018: SEK 335bn
• Funding on international and domestic capital markets.
Lending in Sweden in SEK only.
• Mission: provide members with cost-efficient and stable
investment funding.
8
Legal structure
Kommuninvest i Sverige AB(Credit market company)
Kommuninvest Cooperative Society(Ownership association)
Municipalities and county councils (Ultimate owners: members of Kommuninvest Cooperative Society)
Ownership: 100%
9
Explicit & unlimited guarantee from membersunderpins AAA/Aaa rating
STRONG
STABLE
IMMEDIATELY
ENFORCEABLE
• Joint and several guarantee (explicit, irrevocable and unlimited )
signed by all members of Kommuninvest Cooperative Society,
for all undertakings made by Kommuninvest i Sverige AB.
✓ municipalities and county councils cannot be declared bankrupt and
cannot cease to exist other than by merging;
✓ Swedish municipalities and county councils are entitled to levy taxes;
✓ state bears ultimate responsibility for the local government sector.
• Underpins Kommuninvest’s AAA/Aaa rating.
• No Swedish local government has ever defaulted
on a payment commitment.
✓ Sweden’s Supreme Administrative Court confirmed the right of local
government to sign the joint and several guarantee in a 1994 ruling.
• Investors can make a claim on any, or all, of the guarantors
without a court order
✓ All debt guaranteed by Swedish local governments is BIS 0% risk-
weighted in the EU area
10
Kommuninvest 1987 - 2017
Regional nd Local governmentborrowing needs & Kommuninvest’s
lending
12
Local government investments on the rise
0
20
40
60
80
100
120
140
160
180
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*
Municipalities Municipality owned subsidaries Regions
Population growth
Ageing infrastructure
SEK Billion
13
Local government debt development
0
100
200
300
400
500
600
700
Municipalities and their subsidaries Regions
0%
20%
40%
60%
80%
100%
120%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
National government Households
Local governments Companies
SEK Billion Share of GDP
Funding and Green Loans and
Green Bonds
15
Funding Strategy
Our ALM strategy means:
• Diligent matching between assets and liabilities.
• Funding needs to a high degree determined by
developments in lending.
• Conservative liquidity management, with a liquidity
reserve composed solely of HQLA assets.
In our long-term funding we have a focus on benchmark
funding in SEK and USD, including green funding. Our third
strategic market is Uridashi funding in the Japanese
market.
Funding need 2018:
SEK 130 bnlong-term funding
16
Funding Activity H1 2018
41%
48%
10%
1%Funding by currency (excl. commercial paper borrowing)
SEK, 41%
USD, 48%
JPY, 10%
TRY, 1%
38%
50%
12%Funding by programme
(excl. commercial paper borrowing)
Swedish benchmarkprogramme, 38%
Benchmark funding, 50%
Uridashi, 12%0 25 50 75 100
2010
2011
2012
2013
2014
2015
2016
2017
2018*
Yearly funding by currency 2010-2018
SEK USD JPY Other
17
40
50
60
70
80
90
100
Jan/16 Jul/16 Jan/17 Jul/17 Jan/18 Jul/18
Ba
sis
Po
ints
Kommuninvest vs Sweden Goverment Bond 5y
Swedish Benchmark Programme
Since 2016 the spread against Sweden Government Bonds has
tightened. Kommuninvest view is that the spread should tighten
even more in the future due to potential growth in the Swedish
Benchmark Program and more transparency and higher liquidity in
the secondary market.
18
A leading Nordic green bond issuer
• Sweden’s largest issuer of green bonds:
- USD 600m green bond (maturing 04/2019)
- SEK 5bn green bond (05/2020)
- USD 500m green bond (06/2021)
- SEK 4bn green bond (12/2021)
• Green loans offered to clients since 2015:
- Current green loan portfolio includes
committed funding for ~180 green investment
projects in >85 Swedish cities and regions
Strong potential pipeline, due to investment
trends and green aggregation model
0
5
10
15
20
25
30
35
SE
K b
n
Green project portfolio and green bonds issuance
SEK 3bn Green Bond (12/2021)
USD 500m Green Bond (06/2021)
SEK 5bn Green Bond (05/2020)
USD 600m Green Bond (04/2019)
Committed to projects
Disbursed to projects
19
Green Bonds
• Finance investment projects undertaken by our member
municipalities and county councils/regions.
• Eligible projects are screened and initially approved by
consensus vote in the Kommuninvest Green Bonds
Environmental Committee.
• Green Bonds framework adheres to the guidelines set
out by the Green Bond Principles.
• Second opinion från Cicero.
• To date, we have issued five green bonds.
20
Green loans for eligible investments
21
Nordic Position Paper on Impact Reporting
• Joint position paper on impact reporting from ten Nordic public sector issuers
• Common positions on Financial, Environmental and Procedural aspects of impact reporting
• Initiated by Kommuninvest and launched at OECD Green Investment Financing Forum in Paris on October 24, 2017 and events in London, Stockholm, Oslo and Helsinki.
Follow-up of members & risk management
23
Credit analysis modelwww.kommuninvest.org
23
Kapacitet Environment
Commit-ments
Liquidity
ProfitabilityCapacity
Resultat
Assessment
Member follow up
Sector follow up
24
14
45
58
54 55
33
15
9
5
1 1 0 0 00
10
20
30
40
50
60
70
0 0,5-1 1,5-2 2,5-3 3,5-4 4,5-5 5,5-6 6,5-7 7,5-8 8,5-9 9,5-10 10,5-11 11,5-12 12,5-13
Nu
mb
er o
f m
un
icip
alit
ies
2014 2015 2016
Risk evaluation
Quantitative model based on 11 key ratios
Member key ratios analysed against both the member’s own trend and the average for similar members.
Tre
nd
Population growth Net cost Results / turnover
Solvency incl. pension commitments Taxable capacity Net debt
Avera
ge
Tax Results before extraordinary items Debt / turnover
Financing of assets Loan debts
Relations to Central Level
26
Relations to Central Level
• Kommunivest is a credit institution and is governed by bank
regulations.
• Kommuninvest is supervised by Swedish FSA
• Kommuninvest is also governed by the resolution regulations
that is based on the EU Bank Recovery and Resolution
Directive
• Informal contacts with Ministry of Finance
