Agencies : Extension of our coverage universe to Municipality Finance

Created in 2001, Municipality Finance Plc (MuniFin) is the Finnish local government funding agency specialized in financing local authorities and non-profit housing sector. Its objective is to provide lo ans to municipalities, municipality controlled entities and non-profit entities based on its access to the capital markets . MuniFin is a 100% public ly owned institution: Finnish municipalities are holding 53% of the capital, followed by Keva, the local government pension fund (31%), and the Republic of Finland (16%). Its ratings are Aa1 (stable) and AA+ (stable) by respectively Moody’s and S&P, thus in line with the Republic of Finland’s ratings. T he Municipal Guarantee Board (“MGB”) acts as the guarantor of MuniFin on all its financial obligations . Therefore, b onds issued by MuniFin benefits from an explicit guarantee from the MGB. The MGB is a public law institution which only mission is to ensure the viability of a joint funding system for Finnish local governments . As members of the MGB, municipalities are jointly responsible for the funding expenses and commitments of MGB in proportion of their population . The membership is permanent. MuniFin group’s t otal balance sheet reached c.€35bn in 2017, 2% up compared to 2016 based on the growth of the global public sector loan book (6% yoy) to €22.9bn along with that of the liquidity portfolio (24% yoy) to €9.3bn. The overall loan portfolio and the liquidity portfolio are representing respectively a share of 66% and 27% of the total assets as at December 2017 . Given MuniFin’s low risk activity, the solvency ratios are very good (tier 1 ratio at 75.5% in 2017). Regarding the leverage ratio, the bank is fully compliant and even well above the 3% requirements, at 3.84% in 2017. The main source of funding of MuniFin is the capital bond markets. Currency diversification allows the issuer to reach a wider investor base and to ensure competitive funding. Therefore since 2016, the institution has started to build a liquid bond curve in euros. As of today, MuniFin has four outstanding euro benchmark bonds, out of which a €500m green bond due September 2027. For 2018, the funding programme should amount to around €7-8bn. In the current euro bond markets, MuniFin offers a good diversification opportunity compared to French agencies given the credit quality up-notch in terms of guarantee as well as ratings (AA+ vs AA). Indeed, F r ench agencies benefitting from a 0% RW (Cades, Unédic, and CDC) are currently trading relatively in line with MuniFin’s papers for the same level of regulatory treatment . For insurance companies , the Solvency Capital Requirement s for MuniFin and French agencies are similar, i.e. standard and depending on the same rating category criteria . However , in our view, MuniFin remains an interesting diversification option on the long part of the curve given the current positive spreads vs OAT and the overall scarcity of long-dat ed supply from French agencies.