EU-LEAP Analytical Centre (NGO EU-LEAP) is implementing a project aimed to assess the state of the local loan bond market in Ukraine and the potential for using this tool to finance the development and recovery of communities. Within the framework of the project, the team analysed the current legislation, the practice of bond issues by Ukrainian cities, and the financial capacity of seven urban communities. This article summarises the main findings, which can be useful to local governments when assessing the feasibility of local borrowing.

Local loan bonds can complement grant funding, subventions, bank loans, and loans from international financial organisations. At the same time, this is not simply a way of increasing the development budget. Issuing bonds means that the community raises funds today and undertakes to pay investors interest and repay the principal during the next few years.

Therefore, the key question for a local council is not whether the law permits borrowing, but whether the community is capable of safely servicing the loan throughout its term and implementing the project for which the funds are attracted.

EU-LEAP Analytical Centre has reviewed the legislative framework for local loan bonds, the practice of issuing such bonds in Ukraine between 1995 and 2021, and the financial capacity of Kyiv, Lviv, Odesa, Dnipro, Kharkiv, Vinnytsia, and Chernivtsi for 2023-2025. The findings show that the financial scale of a community is important, but does not in itself determine its readiness to enter the capital market.

Benefits for the community from issuing bonds

A local loan bond is a type of security under which the community, represented by the relevant council, undertakes to make the payments specified in the terms of issue and to redeem the bond by a specified date. Investors may include banks, investment funds, insurance companies, and other legal entities or individuals.

Unlike a grant, the attracted funds have to be repaid. Unlike a single bank loan, bonds can be placed with a wider range of investors. Meanwhile, the issue requires the preparation of a council resolution, approval of the borrowing terms by the Ministry of Finance, determination of a credit rating, preparation of the issue documentation, completion of registration and depositary procedures, and proper disclosure of information.

Proceeds from bonds cannot be used to finance the routine daily needs of the community. They are channelled into the development budget and directed to the establishment, reconstruction or modernisation of long-term infrastructure projects. These may include transport and engineering infrastructure, water supply, heating, energy efficiency, communal and social facilities, specialised equipment and other public investment projects.

Practice in Ukraine confirms that such borrowing is predominantly infrastructure-related. The funds were channelled into roads, public transport, utility networks, housing and utility services, and environmental and social projects.

When bonds are more appropriate than other sources of funding

Bond issuance is most justified for a sufficiently large, well-prepared, and long-term project. Its scale should justify the costs of credit rating, financial and legal advisers, underwriting, registration of the issue, and subsequent reporting.

For a small project or a short-term need, a bank loan may be simpler to manage. A loan from an international financial institution may offer a more favourable interest rate, a longer term and technical support, but usually involves a complex selection process and a significant preparation period. Bonds become particularly relevant when a community seeks to diversify its sources of funding, attract domestic investors, and establish its own public credit history.

Formal limits do not necessarily indicate financial readiness

Budget legislation sets out several basic safeguards. The volume of borrowing is linked to the development budget deficit. Expenditure on servicing local debt may not exceed 10% of general fund expenditure in any budget period in which the relevant payments are made. The total volume of direct and guaranteed local debt is also subject to limits.

However, remaining within statutory limits is not sufficient proof of creditworthiness. A community may formally be eligible for new borrowing, but may not have sufficient available resources to service it safely.

Before entering the market, at least five factors need to be assessed.

The stability of own revenues. Not only is the total budget size important, but also the proportion of revenue that the community can actually manage, its growth trends, and its dependence on a single tax, a major taxpayer or decisions by central authorities.

The quality of budget forecasting. A systematic failure to meet revenue targets suggests that future resources for debt servicing may be overestimated. An investor will assess not only the current budget but also the community's ability to forecast it realistically over several years.

Discretionary funds after mandatory expenditure. Debt repayments compete not with an abstract revenue figure, but with the funds that are available after covering salaries, energy costs, social benefits, and other priority needs.

All existing liabilities. Not only the direct debt of the local budget needs to be analysed, but also loans taken out by utility companies, local guarantees, foreign currency liabilities, their repayment terms, and the possibility of payments from the community budget.

Resilience to adverse scenarios. The financial model needs to demonstrate what will happen in the event of a reduction in revenue, an increase in interest rates, a rise in project costs, delays in its implementation, or the need to honour guarantee obligations.

Lessons from Ukrainian cities

The Ukrainian local bond market remains small. Between 1995 and 2021, 19 cities carried out such issues, with the total recorded volume of domestic issues amounting to approximately UAH 16.88 billion. Around 89.6% of this volume was accounted for by Kyiv, Kharkiv, and Lviv. No new issues have taken place since 2021.

However, an analysis of seven major cities shows that readiness to borrow is determined by different combinations of factors. Lviv has experience of repeat issuances and has redeemed three series of bonds early, totalling UAH 900 million. Odesa combines the absence of direct debt with a stable revenue base and a credit rating. Vinnytsia and Chernivtsi have a low direct debt burden; however, a separate challenge for them will be preparing for their first market entry and building the necessary institutional capacity.

These examples confirm that a community with a larger budget is not always automatically better prepared. The strongest profile is characterised by stable own revenues, realistic planning, the absence of overdue liabilities, transparent debt reporting, and the ability to manage an investment project.

Where to start with preparations

Before drafting the council resolution and the issuance documents, it is advisable to carry out a pre-issuance assessment of the community. This should provide answers to four questions:

1. Which project is financed, has the relevant documentation been prepared, and is the implementation timeframe realistic?
2. What level and duration of borrowing can the budget sustain under the base and stress scenarios?
3. What would be the optimal structure for the bonds: maturity, interest rate, repayment schedule, series, placement method, and investor protection mechanisms?
4. What institutional, managerial and documentary elements is the community lacking in order to complete the procedure and subsequently fulfil its obligations?

The outcome of this work should be a financial model, a risk assessment, a recommended maximum issue size, a repayment structure, and a detailed roadmap for preparation.

A community is ready to issue bonds not when it is formally able to borrow funds, but when it can reasonably explain to the council, investors, and residents why the funding is required, from which sources the debt will be serviced, and how the project’s implementation will be ensured even under adverse conditions.

Such preparation allows communities to determine, even before incurring costs for credit ratings, advisers and issuance procedures, whether bonds are the optimal instrument for a particular community.

This material has been prepared by the editorial team of the Decentralisation portal based on the findings of the research conducted by EU-LEAP Analytical Centre (NGO EU-LEAP) on the legislative regulation of local loan bonds, the practice of issuing them in Ukraine, and the financial capacity of Ukrainian communities.

The research was conducted within the framework of the project “Development of the local bond market in Ukraine: Analysis of Regulation, Practice and Potential for Community Recovery”, supported by the Askold and Dir Foundation, administered by ISAR Ednannia as part of the project “Strong Civil Society in Ukraine – Driving Force for Reforms and Democracy”, funded by Norway and Sweden.

The content of the research is the responsibility of EU-LEAP Analytical Centre (NGO EU-LEAP’) and does not reflect the views of the governments of Norway, Sweden or ISAR Ednannia.

The conclusions and recommendations of the research have been used to prepare practical guidance for local government representatives.