Business

Demand for financing remained strong in 2018. The company’s funding was also very successful.

Financing for investment decisions that build a sustainable society

MuniFin offers financing for the investments of the municipal sector and for state-subsidised housing production. Financing is used to build housing, hospitals, schools, day care centres, bridges and roads all around Finland. MuniFin is the major financier in its customer segment and provides comprehensive advice from investment planning to implementation. In 2018, a total of EUR 2,953 million in financing was withdrawn to new projects.

Demand for financing from MuniFin remained strong in 2018. Demand for financing exceeded expectations in the municipal sector, due to reasons such as the lower-than-anticipated tax revenue. Financing for state-subsidised housing production also developed steadily during the year. Rapid urbanisation and migration into growth centres maintained the need for affordable rental housing, and state-subsidised housing production remained at a good level in spite of the abundance of market-financed housing construction.

MuniFin issued a total of EUR 3.0 billion in new loans in 2018. The total lending portfolio at year-end amounted to EUR 22.4 billion and the leasing portfolio to EUR 614 million. The amount of loans withdrawn during the one-year period grew by 21% from the previous year.

Competition remained tight in financing in 2018. MuniFin remains by far the largest financier in its customer segment. It further bolstered its position as a provider of financing for central government-subsidised housing production in 2018. Demand for financing is expected to remain stable in 2019.

Support for many changes in the operating environment

Although general economic development was favourable in 2018, the uncertainty prevailing in international markets is reflected in Finland and municipal finances. The global political situation, indications of a slowdown in European economic growth and the tapering of quantitative easing by central banks caused tension in the economy. MuniFin actively follows and analyses the outlook for the global economy. The company also informs its customers about market trends, such as with its monthly market reviews, updated in October 2018.

In Finland, the anticipated regional government, health and social services reform may have a significant impact on MuniFin and its customers’ operating environment. It has posed uncertainty in the investment decisions of municipalities for a long time. Even though the situation is unclear, municipalities have plenty of vital investment needs that must be satisfied. MuniFin helps its customers to evaluate the effects of the regional government, health and social services reform on their investment needs.
In its own operations, MuniFin is prepared for the potential changes that may follow the regional government, health and social services reform.

In its housing production, MuniFin closely monitors and analyses trends in population-drain regions, produces information to support municipalities in their decision-making and seeks the best solutions with customers to solve their challenging financial situations. It is key to react early enough before the financial situation escalates into a crisis. In this effort, MuniFin works in close cooperation with the State Treasury and ARA.

Ensuring the continuity of affordable housing production is vital for the continuation of strong economic development as it improves the mobility and availability of labour. The future of state-subsidised housing production will largely be determined by the Parliamentary elections in spring 2019 and the housing policy programme laid down by the incoming government.

Comprehensive assistance with investments, right from the start

In line with its strategy, MuniFin focuses on providing even better service to its customers and their ever-changing needs. In 2018, MuniFin sharpened its customer strategy. Based on the customer strategy, a new customer relationship management model has been adopted and customer teams have been reorganised. The aim is to harness the company’s broad expertise to benefit customers even better and to find the solutions that are the best fit for each customer.

MuniFin wants to support its customers at an early stage when they are planning investments, helping them to assess the financial impacts of investments and alternative solutions. To ensure comprehensive service, MuniFin has also firmed up its cooperation with its subsidiary Inspira, which specialises in financial advisory services.

Digital financial management services to support decision-making

MuniFin is making increasingly extensive use of a variety of technologies in both its internal work and services for customers. A plan for the development of digital services was drafted in 2018. The plan guides digital development efforts going forward. MuniFin’s strength is its deep knowledge of its customer base. The development of e-services ensures that customers are provided with even more information to support their decision-making as well as enhances both efficiency and transparency in their financial management.

The user base of Apollo, MuniFin’s digital financial management service package, expanded to more than 160 customers in 2018. MuniFin is committed to the continuous development of the Apollo service in close cooperation with customers.
Apollo was expanded with significant new functionalities in 2018. A financial forecasting tool enables municipalities to make assessments on the long-term effects of investment decisions on their municipal finances. This tool was developed and piloted in close cooperation with customers. MuniFin intends to make it widely available to customers as part of the Apollo service in 2019. Another cooperation, integrating loan portfolios of housing corporations into Apollo enables a clearer overview of the finances of municipal enterprise groups.

MuniFin’s strength is its deep knowledge of its customer base. The development of e-services ensures that customers are provided with even more information to support their decision-making as well as enhances both efficiency and transparency in their financial management.

Responsible financing options

Alongside traditional loans, alternative forms of financing have grown in popularity, catering to the need for flexibility in the face of changes in the operating environment. For example, demand for real-estate leasing remained strong in 2018 and has been widely used in school projects. Projects that combine real-estate leasing financing and the lifecycle model have also become more popular. In 2018, MuniFin launched a credit facility product designed especially for the needs of large municipalities and hospital districts, which enables municipalities to secure financing for large projects, such as hospitals.

MuniFin’s green financing for environmental investments was also in demand in 2018. A total of EUR 340 million in green financing was withdrawn in 2018. The total number of projects started up in the review year remained on a par with 2017. This form of financing for investments that yield clear and quantifiable environmental benefits has also become more popular in the housing sector, in which 12 green finance projects were initiated during the year.

Decisions on granting green finance are made by a Green Evaluation Team comprising external experts. By offering a margin discount for green finance, MuniFin encourages its customers to opt for more environmentally friendly solutions.

Lending portfolio in 2014–2018, EUR billion

Lending portfolio in 2014–2018, EUR billion

Lending portfolio by rate type

Lending portfolio by rate type

Lending portfolio by customer type

Lending portfolio by customer type

CASE 2018

Apollo produces financial forecasts in a visual format

In 2019, MuniFin customers will be able to draft long-term financial forecasts with the Apollo service’s new tool. In addition to forecasts, this tool enables the assessment of the long-term effects of future investments on municipal finances.

Along with figures, the financial forecasting tool produces visual graphs that facilitate the communication of the forecasts. Users can select different criteria to calculate forecasts. The tool sources actual financial figures, results, balance sheets and cash flow statements of municipalities from data kept by Statistics Finland. It also enables users to compare the financial figures of their municipality with those of other municipalities.

The tool was built in a short period of time and in agile cooperation with customers. Information and decision-making tools are being added to the Apollo service one piece at a time to help users with their investments and financing. At the same time, MuniFin is promoting digital service development, financial planning and responsible ­decision-making in the whole sector.

Inspira: Changes in the operating environment  of customers increase the demand for services

The MuniFin subsidiary Inspira specialises in advisory services. Its assignments focused on the regional government, health and social services reform under preparation, participating in the competitive tendering processes of school and daycare centre buildings, and M&A projects. Inspira is taking a central role in the group’s expert service offering.

Changes are occurring in the operating environment – of these, the ageing of the population and migration within Finland in particular increase demand for Inspira’s services. There is a growing need for care services in municipalities with an ageing population, while new infrastructure and schools and daycare centres are being built in growth centres.

In 2018, a large share of Inspira’s assignments concerned the regional government, health and social services reform in one way or another. The drafted legislation would have a wide-ranging impact on municipal activities. The projects have dealt with, for instance, organising tenders, sales of nursing homes, and organising municipal support services.

Demand for advisory services for municipal construction projects based on a lifecycle model also remained strong, as municipalities are seeking sustainable solutions for indoor air problems in schools and daycare centres. During the fiscal year Inspira participated in several ownership arrangements within municipal service production, for example in energy sector and property maintenance. It also supported hospital districts in the rearrangement of support functions. Inspira’s turnover in 2018 was EUR 2.5 million (2017: EUR 2.7 million).

Anssi Wright assumed the position of CEO in September. At the end of the year, Inspira had a total of 10 experts in its employ.

Inspira continues to develop the competence of its employees in order to offer best expertise for its customers in varying situations. The service offering is continuously refined to better serve changing customer needs. In the future, Inspira seeks to take a more central role in the group’s expert service offering.

CASE 2018

Finland’s largest wooden school centre will be built using a lifecycle model

As part of the renovation of Imatra’s schools and daycare centres, a school complex made from solid wood will be built in the Mansikkala district. The approximately 11,000 m2 building, which has been valued at EUR 45 million, is a bold, innovative and nationally pioneering project that combines environmental friendliness, wooden construction and extreme flexibility in terms of the use of space.

MuniFin’s subsidiary Inspira identified alternative implementation and financing models for the school project. The school centre will be implemented using a lifecycle model. In the lifecycle model, all engineering works, construction works and long-term maintenance comprise a single contract that is put out to tender. The contractual counterparty is responsible for all technical project risks during the contract period, which in the case of the Mansikkala school centre is 20 years.

The Mansikkala school centre is a bold, innovative and nationally pioneering project.

Funding

Efficient global networks enable investments in Finland

MuniFin acquires all its funding from international capital markets. In 2018 good conditions prevailed in the markets, although some risks emerged towards the end of the year and weakened the markets. Finland’s improving economy benefits the company’s already good reputation.

2018 was characterised by growing tension between major world powers and the threat of an international trade war, the deteriorating economy of Italy and the countdown to Brexit in early 2019.

However, the economy boomed in 2018. Growth in the Finnish economy outperformed the Euro zone and the debt-to-GDP ratio is expected to decline. The capital markets have also noticed this, further bolstering Finland’s and thus MuniFin’s reputation.

In the second half of the year, the market mood became more unstable and risk premiums started to surge. At the same time, interest rates took a downward turn towards the end of the year. Underlying these developments were the weaker outlook for international trade, economic policy problems in the Euro zone and the tapering of the European Central Bank’s asset purchase programme.

These uncertainties had only a slight impact on MuniFin’s funding, in which the company’s performance was excellent. The total amount of new funding in 2018 was EUR 7.4 billion (2017: EUR 9.6 billion).

Successful issuances

The share of MuniFin’s funding accounted for by public issuances in 2018 was higher than planned. Demand for euro-denominated bonds in particular saw growth.

MuniFin issued four benchmark bonds, with two denominated in USD, one in GBP, and one in EUR. The 15-year tenor of the EUR 500 million benchmark bond is the longest in the company’s history so far.

The timing of the benchmark bond transactions was excellent. The company expected that the European Central Bank would start exiting its asset purchase programme, which is why the benchmark bond transaction was carried out in the euro market at the beginning of the year. In addition to new transactions, the company increased its existing euro benchmark bonds by opening them up to new investments.

The share of public benchmark bonds in MuniFin’s funding and the proportion of institutional investors among its investor base have grown continuously. Accordingly, the company maintains an even stronger focus on predictability in its benchmark bond strategy in order to serve its institutional investor base even better. MuniFin has around 20 international banks as long-term partners that assist as brokers for benchmark bonds.

MuniFin acquires a significant share of its funding in Japan, where it was one of the major Nordic issuers in terms of volume in 2018.

Total number of funding transactions 2014–2018

Total number of funding transactions 2014–2018

Investors are interested in responsibility

The public green bonds issued by MuniFin, that is, bonds earmarked for environmental investments, have been in high demand. Issuances have been oversubscribed quickly. In March, MuniFin won the annual Green Bond Award from Environmental Finance magazine. The award-winning EUR 500 million bond was issued in autumn 2017 and is the most sought after bond in the company’s history. It was oversubscribed six times.

MuniFin became the first issuer of sustainable bonds on the Finnish stock exchange, when Nasdaq Helsinki opened its new Sustainable Bond Market on 31 May 2018. MuniFin dual listed its two green bonds, originally listed on the London Stock Exchange, on the Nasdaq Helsinki as well.

The company keeps a close eye on demand for sustainable products in the international capital markets. Demand for green bonds earmarked for environmental investments has grown. MuniFin intends to issue its next green bond in 2019.

Award-winning work in the Japanese market

MuniFin has actively issued structured products in Japan. In October, the company was recognised for its work in the country’s capital markets: MuniFin won in the most respected category of the awards organised by the UK-based market data provider mtn-i, which selected the company as the Uridashi Issuer of the Year. Additionally, MuniFin received the Deal of the Year Award in the category of equity index-linked deals.

The Uridashi market accounts for about 20 per cent of MuniFin’s annual funding. Additionally, the company intends to keep proactively serving its Japanese investors in the future.

Preparing for uncertainty

A potential trade war poses a great risk to the growth of the global economy. In the second half of 2018, share prices already started to slide. As uncertainty mounts, financial costs are also expected to rise. The European Central Bank is expected to increase its key interest rate in the latter half of 2019.

If Italy’s debt situation escalates into a crisis and its discord with the EU continues, this will unavoidably impact all of Europe. MuniFin maintains a diversified funding programme and is prepared to replace funding in the Euro zone with other currencies if the Euro zone faces a crisis and demand for euro currency and risk declines.

In 2018, MuniFin prepared itself for Brexit to minimise its impacts on the company’s operations. New agreements were drafted with new counterparties established in the EU, and this work will continue in early 2019.

The reference rate reform also causes instability in the capital markets. A decision has been made of discontinuation the London Interbank Offered Rate (LIBOR) by the end of 2021. Like Euribor, Libor is a floating rate to which a substantial number of financing agreements have been tied. Changes in it also have a great impact on the international financial markets. It is not yet known how and with what Libor will be replaced. MuniFin seeks to avoid Libor-linked products for the time being.

The reference rate reform also concerns the Euro zone, as the future of the Eonia and Euribor rates also remains uncertain. It has already been decided that Eonia will be discontinued. Euribor does not fulfil the new requirements either.

2019 will be a challenging year in the international capital markets. MuniFin has a solid position in these markets and thus it is expected that the availability of financing will remain good in the year ahead in spite of the uncertainties. MuniFin will issue benchmark bonds in 2019 as well.

Establishing global networks to best serve Finnish customers

MuniFin’s funding seeks to ensure the availability of financing from international capital markets for Finnish customers as cost-effectively as possible over the long term, in spite of the market situation. One of the guiding principles of MuniFin’s funding is effective diversification. MuniFin has diversified its funding across markets, currencies, maturities, and different types of investors. The company ensures that its funding avoids the use of unethical underlying instruments in index loans and selects the issuance currencies carefully. Derivatives are used to hedge against currency and interest rate risks.

The work of capital market experts became even more visible to MuniFin’s customers in 2018. In October, experts started the publication of a monthly market review on the economic outlook for the Euro zone. In addition, a capital market expert participates as necessary in the development of customer service plans together with account managers.

New funding by currency in 2018 %

New funding by currency in 2018 %

New funding by investor type in 2018 %

New funding by investor type in 2018 %

New funding by region in 2018 %

New funding by region in 2018 %

CASE 2018

Awards for responsible funding and work in Japan

Environmental Finance magazine, which focuses on environmental finance themes and green bonds, handed an award in March 2018 to the euro-denominated green bond MuniFin issued in 2017. In addition, MuniFin was the winner of the award for the largest local issue in Environmental Finance’s Green Bond Awards. The jury included investors, banks and other environmental experts who have a major influence on how international environmental investors perceive investments.

MuniFin was also recognised for its long-term work in the Japanese capital markets: it was the winner in the most respected category of the Uridashi Awards, which were handed out for the first time. The UK-based market data provider mtn-i selected MuniFin as the best Uridashi Issuer of the Year in October 2018. Additionally, MuniFin received the Deal of the Year Award in the category of equity index-linked deals.

Uridashi bonds are targeted at Japanese retail investors. The Uridashi market accounts for about 20 per cent of MuniFin’s annual funding.

Liquidity management and treasury

2018 was a twofold year in terms of the market and liquidity investments. The first half of the year was stable and the mood on the financial markets remained upbeat thanks to the strong previous year. Long-term interest rates in the Euro zone saw moderate growth on the heels of US interest rates, and issuers’ risk premiums remained low.

In the second half of the year, the market mood became more unstable and risk premiums started to surge. At the same time, interest rates took a downward turn towards the end of the year. Underlying these developments were the weaker outlook for international trade, economic policy problems in the Euro zone and the tapering of the European Central Bank’s asset purchase programme.

The market change did not have a significant impact on liquidity investments, as the interest rate risk is hedged with interest rate swaps. In addition, the company prepared for the widening of risk premiums throughout the year by increasing the amount of cash investments and shortening the maturities of new long-term investments to reduce their sensitivity.

MuniFin’s total liquid assets at the end of 2018 were EUR 8.7 billion (2017: EUR 9.3 billion). At the end of 2018, investments in securities totalled EUR 5.1 billion (2017: EUR 5.8 billion), and their average credit rating was AA (2017: AA). The year-end average maturity of the securities portfolio was 2.1 years (2017: 2.5).

Optimised liquidity management

MuniFin’s treasury ensures the optimised use of total liquidity. The minimum amount of short-term liquidity, measured by the liquidity coverage ratio (LCR), must meet the statutory requirement on a daily basis. The minimum LCR requirement is 100 per cent. As a long-term requirement, the total liquidity amount must be enough to cover uninterrupted business for at least 12 months (Survival Horizon) in line with the company’s risk appetite framework. The maximum liquidity is adjusted in line with the balance sheet total to prevent it from growing too big in relation to own funds.

At the end of 2018, MuniFin’s LCR was 177% (2017: 173%) and the year-end total amount of liquidity was enough to cover uninterrupted business for 13 months (2017: 12 months).

MuniFin regularly evaluates the liquidity of its investments and the eligibility of its assets as collateral on the repo markets. At the end of 2018, 84.7 percent of all long-term investments met the eligibility requirements of ECB.

Effective market risk management

The treasury department is responsible for the management of market risk at MuniFin in accordance with its risk policies and risk appetite framework. As a rule, the balance sheet interest rate risk position in 2018 was kept at its previous low level by applying interest rate hedging to fixed-rate debts and assets. In 2018, MuniFin decided to change its interest rate risk strategy such that going forward the main focus in interest rate risk management is to stabilise net interest income, taking the prevailing interest rate environment into consideration. The new strategy will be introduced in phases.

MuniFin seeks to effectively manage the currency risk and applies the same very conservative principles as in its management of other risks. MuniFin hedges currency risk with derivatives. The main principle is that all foreign currency denominated funding and investments are hedged on the trading day. Furthermore, MuniFin is obligated to submit foreign currency cash collateral to the central clearing counterparty for use in foreign currency interest rate swaps. This, however, does not have significant profit and loss effects.
Management of liquidity investments
The credit and market risks as well as the expected yield of MuniFin’s long-term liquidity are diversified into asset classes and different countries. In 2018, the spread sensitivity of investments was reduced by shortening their average maturity.

In 2018, the share of investments in financial institutions was decreased, and the share of secured bonds was increased. In addition, outstanding long-term investments were allocated more to short-term investments due to poor expected returns. On the national level, MuniFin reduced the amount of investments with UK issuers, among others.

Responsible investing

In 2018, MuniFin continued to increase its investments in socially responsible investment (SRI) targets. At year-end such investments totalled EUR 110 million. The target amount for SRI was determined on the basis of a percentage share of MuniFin’s outstanding amount of green bonds.

MuniFin makes liquidity investments in compliance with the Responsibility Policy approved by the company’s Board of Directors. The company monitors the environmental and social responsibility and governance practices of the issuers in the liquidity portfolio. This is done by monitoring the ESG scores of investments.

CASE 2018

Robot colleague Väinö processes expiring agreements

Väinö the Robot started work in summer 2018. MuniFin employees were pleased to welcome their first robot colleague, as it performs manual work that they previously sometimes had to do as overtime on weekends. Väinö processes expiring leasing agreements tirelessly and whenever necessary.

The robot utilises an UiPath software robotics platform and was created in cooperation with a specialised robotics company. At the same time, MuniFin has trained employees and built up its capability to make greater use of robotics with its in-house resources.

Väinö has boosted efficiency and freed up time by taking over manual work which enables experts to focus on solving customers’ problems. Job satisfaction has also increased. This is the objective in all of MuniFin’s technology utilisation projects.