The municipal bonds market is well developed in the U.S. (extending to some USD 2 800 billion), but a lot less so in Europe.
A municipal bond is a bond issued by a local government, or their agencies. Potential issuers of municipal bonds include states, cities, counties, redevelopment agencies, special-purpose districts, school districts, public utility districts, publicly owned airports and seaports, and any other governmental entity (or group of governments).
Basically a bond is a debt in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (coupon) and/or to repay the principal at a later date, termed maturity. Thus the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest.
The two types of municipal bonds are general obligation bonds (principal and interest are secured by the full faith and credit of the issuer and usually supported by either the issuer's taxing power) and revenue bonds (principal and interest are secured by revenues derived from tolls, charges or rents from the facility built with the proceeds of the bond issue).
Bonds are usually issued on a scale in the range of tens to hundreds of millions of euro. For this scale, a dedicated municipal bonds agency is required – to aggregate the borrowings from a number of local governments, raise capital on the financial markets through the sale of bonds and on lend the proceeds to eligible councils at a lower rate than if the councils were to issue their own bonds.
A leading example of a national (municipal bonds) funding agency in Europe is Kommuninvest in Sweden. Set up in 1986, Kommuninvest is triple A rated and borrows using bonds. It lends the funds to 260 local authorities to fund projects such as roads and renewable energy. In 2012 its target was to lend more than EUR 20 billion. And last September, the Swedish city of Gothenburg issued a 6 year ‘green’ bond to fund public transport, water management, energy and waste management projects. This raised EUR 50 million and was oversubscribed. A second issuance is planned for the coming weeks. Three French provinces have also raised money via bond issuance to fund green social housing, renewable energy and energy efficiency projects.
In Europe national municipal bond agencies exist in Finland, Sweden, Denmark, Holland, Switzerland, and Italy. France just recently joined the club with the creation of Agence France Locale, and the UK Local Government Association is set to follow suit, reckoning that the local government collective municipal bond agency could save councils more than EUR 1 billion in borrowing costs.