The Federal Government plans to introduce stricter and broader requirements for issuance of sub-national debts by states, local governments and Ministries, Departments and Agencies (MDAs) to safeguard the public and ensure transparency and accountability in sub-national debt management.
A draft on proposed rule on revenue bond by sub-national entities obtained at the weekend indicated that state governments, local governments and MDAs would provide additional guarantees, disclosures and structures to secure approval for revenue bond, in addition to the requirements for debt issuance.
A revenue bond is a bond issued by a state, local government or government agency to finance projects that will generate income. Such income serves as first source of repayment of the obligations and may be augmented by third party guarantee.
The draft issued by Nigeria’s apex capital market regulator, Securities and Exchange Commission (SEC) undergoing rule-making, including exposure to relevant stakeholders. The draft is expected to be approved with little or no modifications, according to previous approvals.
According to the draft, in addition to the general registration requirements for bond issuance, sub-national issuers of a revenue bond shall provide a feasibility study and report stating the rationale for the project, estimates of revenues that the facility could generate, along with any economic, operating, or engineering aspects of the project that would be of interest to the issuer.
The issuing entity will also provide a pledge to the issuer stating that the revenues generated by the operating projects shall be utilised in defraying principal and coupon payments due to the bond holders.
Besides, the issuing entity shall provide an indenture or trust deed stating how revenue received by the state, local government or the MDA shall be disbursed to the bondholders as well as evidence of a dedicated escrow or sinking fund account, specifically dedicated for servicing of the revenue bond with revenue earmarked from the project.
Also, the state, local government or government agency shall provide assurances and guarantees in the prospectus to the effect that the bond proceeds shall be expended solely for the project, that construction works shall be inspected quarterly by professionals and the reports of such inspections submitted to SEC and that the completed project shall be handled and maintained in a businesslike manner by named professionals.
The issuing entity shall provide an undertaking that the asset financed by the revenue bond and the resultant revenue shall be ring-fenced through the use of a Special Purpose Vehicle (SPV) in whose name the title of the completed project shall be issued, where applicable.
There will also be an undertaking that the ownership of the asset shall not be transferred to the state, local government or government agency until full redemption of the bond obligation. Other requirements include a schedule of fees or the rate structure to be charged, designed to keep the project self-supporting; a statement in respect of financial safeguards for the bond proceeds and revenue to be generated from the asset by the state, local government or government agency and a statement as to the flow of funds under the revenue bond including operation and maintenance of the project; debt service provisions for principal and coupon; debt service reserve arrangements; reserve maintenance fund to supplement the general maintenance fund where applicable; surplus funds, which may be used for several purposes, such as early redemption of bonds where the Trust Deed or Bond Indenture permit, paying for improvements; and such other purposes as may be prescribed by the SEC from time to time.
Another significant requirement is the introduction of credit enhancements for revenue bonds by sub-national entities. A credit enhancement is a method through which a company improves its debt or credit worthiness. Credit enhancements provide additional assurance that a borrower will honour its obligation through the provision of collateral, insurance, or a third party guarantee.
According to the draft, to mitigate the risk of investing in revenue bonds, the issuing entity will be required to provide credit enhancements in the form of Irrevocable Standing Payment Order (ISPO), insurance, third party guarantees, additional funding from endowments and other approved credit enhancements for any revenue bond meant for the general investing public. However, investment in revenue bond issues not backed by any of the above-listed credit enhancements shall be restricted to qualified institutional investors and high net-worth individuals.