A Swiss city administration that has backed a bunch of blockchain-based initiatives has issued a digital bond based on the technology.
Lugano’s public authority has issued a six-year bond of up to CHF 100 million (about £88m/$108m) via blockchain in a move being trumpeted by the parties involved as a public sector ‘first’.
Lugano is the largest city in Italian-speaking southern Switzerland, with a population of more than 60,000 (and more than double that number in wider Lugano area). The affluent lakeside city is already home to 3Achain, an ‘institutional blockchain platform’ promoted by the public administration. The municipality has also been working with a private company, Tether, to ‘leverage bitcoin technology as the foundation to transform the city’s financial infrastructure’ through an initiative known as ‘Plan B’ (where the ‘B’ is written as ‘₿’, like the digital currency’s logo).
The digital bond issuance took place on the Zurich-based SIX Digital Exchange (SDX) platform and saw the authority’s financial division collaborating with Zurich-headquartered Zürcher Kantonalbank (ZKB: Zurich Cantonal Bank), the authority said in an announcement (Italian language).
“This digital bond issuance embeds the City of Lugano’s role as a leader for innovation across the public sector and the learning effects will be far reaching,” Lugano mayor Michele Foletti said in a separate announcement (English language) published by SDX. “Therefore, we strongly encourage the public sector to embrace this innovation and to support this new issuance method.”
Blockchain ‘not adding materially higher risks’
The bond is dual-listed on SDX’s private, permissioned blockchain-based platform and on the traditional SIX Swiss Exchange infrastructure, meaning that investors do not require blockchain access. Issuer and investors will receive respectively issuance proceeds and repayments in Swiss francs.
Rating agency Moody’s gave the bond, which has a 1.625% coupon, an ‘Aa3’ rating.
‘The Aa3 debt rating mirrors the City [of Lugano]’s long-term issuer rating of Aa3 and is equal to debt ratings assigned by Moody’s to Lugano’s traditional bond issuances,’ Moody’s stated.
‘The notes will have the same status of the issuer’s senior unsecured rated bonds and, in Moody’s view, the different technology will not add materially higher risks compared to a traditional issuance,’ the ratings agency said in a note.
‘In Moody’s view, the ultimate credit risk faced by investors is that of the City of Lugano,’ the note continued. ‘The issuer’s Aa3 rating is underpinned by Lugano’s sound financial performance, supported by strong governance and wealthy economy, large fiscal potential and robust cantonal institutional framework. The rating also reflects the city’s high debt exposure and high debt service, which requires careful treasury management.’
In its announcement, SDX described the city administration as ‘pioneering this space for all other major hubs in Europe’.
SIX Digital Exchange head David Newns described the digital bond issuance as “the first municipal digital bond ever to be issued on regulated FMI [financial market infrastructure]”, adding that it “demonstrates the attractiveness of the value proposition represented by SDX’s dual-listed, natively digital bond instrument offering.”
Zürcher Kantonalbank’s debt capital markets head, Michael Wölfle, spoke of a “landmark transaction”, saying that “strong investor interest and placement with close to 20 investors proves that this format is ever more widely accepted as alternative to conventional bond issues.”
Lugano last year made headlines with plans to enable tax payments by crypto. Its authority told Global Government Fintech this week that it was “finalising some formal and legal aspects” and the “project will be launched in the coming weeks.”
‘Swiss city looks to enable tax payments by crypto’ – our news story (14 July 2022) on Lugano’s tax payments plan