The Best Structured Note Issuer is given to a borrower that is active in the Structured Note private placement market offering a full range of not vanilla placements in various currencies through third party dealers. For the third time in a row MuniFin was awarded. MuniFin also won the runner-up as Best Uridashi Issuer.
CMD Portal praised MuniFin for its strong commitment to the structured notes market, transparency, flexibility and adaptivity that are well recognized among market participants. Despite the volatile market conditions last year, MuniFin was able remain agile and meet the needs of the investors.
“We are extremely happy to receive this recognition again from CMD Portal. I believe, in addition to our well-established name and credit rating, the key to our success is our ability to adapt to new market trends and keeping up an active dialogue with our dealers and investors”, says Senior Manager Karoliina Kajova from MuniFin’s Funding and Sustainability team.
Structured notes and private placements in general are a tool for MuniFin to diversify funding sources and broaden its investor base. In 2022, MuniFin issued over EUR 2 billion in private placement and Uridashi format, which is 25% of total new funding.
The European Commission approved on 21 December 2022 an extension to the Finnish subsidised loan and guarantee scheme that allows MuniFin and municipalities to finance municipal energy companies. The Commission also extended the arrangement’s scope of application. The recently approved amendments to the scheme are in place until the end of 2023.
The aid scheme is related to the effect Russia’s war against Ukraine has had on European energy markets. Under normal conditions, EU State aid rules prohibit MuniFin from financing energy companies, but this scheme was approved under the Temporary Crisis Framework to ensure the continuity of the energy sector’s operations and strengthen Finland’s security of supply.
The Commission first granted MuniFin and Finnish municipalities license to finance municipal energy companies in October 2022, but this decision was only effective until the end of 2022. Under the arrangement approved in October, financing could be granted only towards liquidity needs related to the collateral requirements on the derivatives exchange, spot market, balancing market and bilateral trading.
When MuniFin, the Municipal Guarantee Board and the Ministry of Economic Affairs and Employment notified to the Commission of the recently approved scheme for 2023, they extended the arrangement’s scope to cover other potential crisis situations in energy companies. These include the elevated liquidity needs arising from the energy crisis that are related to working capital and investments.
Best prepare in advance
“We’ve been getting some inquiries about municipal energy companies’ financing, and we’re currently processing a few loan applications. We encourage both municipalities and their energy companies to prepare for possible financing needs in advance”, says Aku Dunderfelt, Executive Vice President, Customer Solutions at MuniFin.
MuniFin can finance energy companies either directly or through the municipalities that own them. MuniFin can finance municipal energy companies directly only if they have a 100% municipal guarantee. This requirement applies to all of MuniFin’s finance to companies under municipal control. MuniFin can process loan applications only after the loan has been guaranteed by the city or municipal council, and the funds cannot be transferred until after the guarantee decision has become legally valid.
Municipalities and their energy companies should prepare for potential financing needs in advance. The municipal council’s guarantee decision does not oblige the loan to be withdrawn if it proves unnecessary.
Loans must meet the Commission’s requirements
Loans granted to energy companies by either municipalities or MuniFin must meet the eligibility requirements set out in the Commission’s decision. These include, for example, the energy company’s written account of how it will allocate the funds to needs specifically related to the energy crisis.
Loan contracts under the recently approved scheme must be signed by 31 December 2023 at the latest. The maximum loan amount per beneficiary cannot exceed either a) the liquidity needs derived from the additional collateral requirements for the coming 12 months or b) 15% of the beneficiary’s average total annual turnover over the last three closed accounting periods. In other financing needs arising from the energy crisis than those derived from the collateral requirements on the energy markets, the maximum loan amount cannot exceed the needs for the coming six months. The maximum maturity of the loans is six years, which is three years more than the maximum maturity for loans under the previously approved scheme. The Commission’s decision also sets out minimum requirements for loan pricing and details other technical requirements.
MuniFin encourages municipalities and their energy companies to read the Commission’s decision carefully when preparing their decisions about energy company loans and to take into account the key principles of and references to the Commission’s decision when formulating their own decisions. The Commission’s decision will be available on the Commission’s website soon.
The Sekasin Collective has a vision where no youth is forced to manage their mental health issues alone. To reach this goal, the Collective works to reach young people online in a variety of ways. Their channels are aimed at youths and young adults between the ages of 12 to 29 who are looking for someone who could listen to them.
At the core of the collective’s work is a low threshold for contact. No official diagnoses or medical referrals are needed to start a chat; if the person feels they’d like to chat with someone about how they are doing and holding up, that is enough.
Young people need someone to talk to – and they need it more than society’s equipped to handle
The Collective operates the Sekasin chat, an online service where a large group of volunteers and a host of social and health workers and youth professionals are available to chat with young people. Last autumn the chat, originally available only in Finnish, also started its first official Swedish-speaking service hours. In 2021, people reached out to the Sekasin chat approximately 17,000 times – unfortunately, the Collective had the capacity to respond to only about one in every five people.
Many of the online discussions revolve around anxiety and depression, especially when it comes to youths aged 15 to 19. Over the course of the pandemic, chats initiated by people between 25 to 29 (i.e., young adults shifting from studies to worklife) were also slightly on the rise. Around ten chats each day focus on suicidal or self-destructive thoughts.
The Sekasin Collective also reaches out to its audience on Discord: their Sekasin Gaming community offers Finnish youngsters a place to have anonymous discussions with almost 14,000 other youths. In addition to the peer group, the server also has professionals from different sectors supporting the young participants and moderating discussion to make sure it’s safe around the clock.
Sekasin – every day of the year
The Sekasin Collective’s operations are run by the MIELI Mental Health Finland association, SOS Children’s Villages, the Finnish Red Cross, and the Finnish Federation for Settlement Houses. The Collective’s channels are open for young people on every day of the year, including in and around the Christmas holidays.
The Sekasin chat is open on weekdays from 9am to midnight and on weekends from 3pm to midnight at sekasin.fi. The Sekasin chat is available in Swedish on Mondays and Thursdays from 2pm to 7pm and on Saturdays from 4pm to 8pm. The Sekasin Gaming community on Discord is available and moderated at all hours.
The Sekasin Collective’s work is made possible by charitable donations.
The sanctions imposed on Russia by Western countries and Russia’s countermeasures affected international trade and increased the price of both energy and raw materials. Cost pressures also further accelerated inflation, which had already been increasing in the previous year. Confidence in the economy was badly shaken by the combined effect of the war, the rising cost of living and energy-related concerns.
Further tumult was created by the sharp U-turn in monetary policy. Central banks had been underestimating the risks associated with persistent inflation even before the Russian invasion, so when the monetary policy was finally and belatedly tightened, it had to be done fast and in exceptionally large steps.
Positively surprising economic resilience
Despite the sharp turns in the operating environment, the development of GDP was a positive surprise in 2022. The euro area saw relatively stable growth, and thanks to an unexpectedly strong early first half, Finland’s GDP growth remained positive until the third quarter.
The stronger-than-expected economic development stemmed from several different factors. The bottlenecks in production and supply chains, which severely disrupted goods trade last year, largely cleared during 2022. The service sector also started to revitalise after the COVID restrictions were lifted. Many households accumulated extra savings during the COVID period, which has helped them cope with the rapidly rising cost of living to some extent. The business sector seems to have adapted to the European energy crisis better than expected.
Recession projected to remain mild, but risks are growing
Despite the positive observations above, the growth outlook clearly weakened in all main economic areas this autumn. Finland is likely to have already entered a recession due to the threefold trouble households have with food, energy and housing costs, which are all rising quickly and eroding consumers’ purchasing power and bringing down private consumption. The rapid increase in interest rates is slowing down investments and cooling down the housing market. Residential property prices have already turned to a noticeable decline.
Thanks to Finland’s robust industry and high employment, MuniFin still estimates that this period of economic recession will be relatively mild and short-lived. We maintain our GDP forecast for the next few years unchanged, at -0.5% for 2023 and 1.5% for 2024. We revised our GDP forecast for the current year slightly, raising it to 1.8% due to the unexpectedly strong economic development.
It should be noted, however, that the above-mentioned scenario of mild recession involves considerable risks. Consumers’ savings will shrink and the negative effects of the rising cost of living may begin to accumulate during the next year. Moreover, the simultaneous cooling of the economic cycles in Europe, the United States and China may weaken exports more than expected.
Sharply rising interest rates also pose a significant risk to future economic development, and they have not yet had their full effect on all debtors. Many households have their interest rate review dates in the first half of 2023 and will not face the substantially rising loan servicing costs until next winter and spring.
High employment steadies the outlook
For now, employers seem to be looking beyond the temporary recession, aiming to retain skilled workforce. Layoffs return on the agenda if the economic stagnation becomes worse than expected in the winter, but large-scale unemployment is still a long way from the severe labour shortage currently occurring in Finland.
It is to be expected that the contracting economic cycle will eventually also affect the labour market to some extent: employment growth will halt and the unemployment rate will turn to a moderate rise. MuniFin still expects unemployment to rise moderately to 7.4% next year and to remain at approximately the same level (7.3%) in 2024.
Interest rates will continue to rise in early 2023
The strongest rise in consumer prices is already calming down, but it may take a couple of years for inflation to slow down to the target level of the central banks. Interest rate hikes will presumably continue at least through the first half of 2023, with other ways of tightening monetary policy lasting much longer. Key interest rate is expected to rise to around 5% in the United States and to around 2.5–3% in the euro area.
Inflation peak soon passed
In Finland, inflation reached its highest level in almost 40 years in 2022, but nevertheless remained below the euro area average. Energy prices have affected inflation somewhat less in Finland than in Central Europe, and long contract periods might also factor into this as they react to cost pressures with a delay. The flipside to this is that inflation may also fall more slowly in Finland than in the euro area.
MuniFin revised its inflation forecast for the current year to 7.0%. The inflation peak will probably occur at the end of 2022, but inflation will remain at an exceptionally high level also next year. In 2023, we expect consumer prices to rise at an average rate of 4.5%, and in 2024 we expect inflation to finally decrease to 2%.
The year 2023 is an opportunity for municipalities to make their economy more sustainable
Finland’s health and social services reform will change Finnish municipal sector fundamentally. It will halve the volume of municipal operations and shake up the structure of income and expenses. But municipalities will not bear the full force of these changes next year as they will be soothed by a one-time tax benefit of more than one billion euros, stemming from the tax cuts introduced by the reform and implemented fully only in 2024.
Thanks to this temporary tax benefit, municipalities will be in a stronger position in 2023 than ever before in the 2000s, even though the increase in salary and interest expenses and the acceleration of overall inflation will take a toll on municipal sector as well. This will offer municipalities some breathing space next year, which they would be wise to spend on securing their financial sustainability in the long term.
One of the reform’s financial effects is the heightened significance of capital expenditure: the needs for municipal investments will not drop nearly as much as operating expenses. At the same time, depreciation will play a greater role in the municipal cost structure. After the reform, it will be even more important for municipalities to ensure their investment capacity.
Municipalities should not be fooled by the temporarily strong financial figures of 2023. Instead, they should pay even more attention to securing sufficient income now that interest rates have risen considerably and made loan servicing costs a significant cost item again.
The gap between financially strong municipalities and those in deficit will widen
The health and social services reform is widening the financial gap between municipalities, giving financially strong municipalities more room to manoeuvre while putting municipalities that are in deficit in an even more difficult position.
It is especially important for municipalities in structural deficit to try to find solutions to their situation. As a general rule, the reform will not significantly change the municipalities’ financial balance in terms of euros, but imbalances may grow markedly in relation to the size of the operational economy. Municipalities will have a much more limited scope for adjusting their operations in the future.
In some municipalities, the need to improve the cost-effectiveness of core operations can prove so great that it may well speed up cooperation between municipalities and eventually also result in municipal mergers. Severe financial deficit is relatively more common in small municipalities with less than 5,000 inhabitants than in large and medium-sized municipalities.
Finnish municipalities will also have to prepare for the possibility that a severely imbalanced central government finances may reflect on state transfers in the coming years. Even though the rising costs of health and social services will be removed from municipalities, the financing gap of the wellbeing services counties will pose an indirect threat to municipal finances as well.
PCAF is a partnership of financial institutions with 346 members worldwide that work together to implement a harmonised and transparent method for GHG accounting. By joining, MuniFin commits to measure and disclose GHG associated with its lending and liquidity portfolios.
As a financial institution, MuniFin makes its greatest positive impact through its customers and financing the green transition.
“As the only financial institution in Finland specialised in financing municipalities and the affordable social housing sector, our mission is to build a more sustainable future together with our customers. To better succeed in this, it is imperative to understand the climate impact of our lending portfolio”, says Sustainability Manager Kalle Kinnunen.
The regulatory requirements for disclosing financed emissions are catching up, but it is the voluntary efforts that generate the greatest results.
“PCAF and the global GHG accounting and reporting standard have become the gold standard and we are happy to join this development and remain in the ranks of forerunners in sustainability. We had already applied PCAF’s guidance to our GHG accounting before joining. Still, methodologies for many sectors are continuously developing rather than established. We hope to benefit the network with our expertise on the municipal sector”, Kinnunen continues.
Reducing emissions is vital across the economy. According to Kinnunen, collaboration is key when it comes to sustainability and Finnish municipalities are a great example.
“The Finnish HINKU network is a great demonstration. Already 92 Finnish municipalities are members and they are committed to reducing their emissions by 80% from their 2007 levels by 2030. The network is coordinated by the Finnish Environment Institute SYKE that is the forerunner in municipal emission calculation, not only in Finland, but globally”, says Kinnunen.
In 2016, MuniFin was the first financial institution in Finland to offer green finance for climate and environmentally friendly investments, such as public transportation, renewable energy and sustainable buildings.
“Buildings are a significant source of emissions and to reduce them, energy efficiency is an important aspect to focus on. We want to continue to encourage and support our customers to make investments that reduce their emissions while meeting the needs of the people”, Kinnunen explains.
Kinnunen is eager to start the collaboration.
“We joined PCAF to better understand our impact. We need actual numbers, measurable goals and transparency followed by actions to push the whole industry towards more sustainable choices”, he says.
Further information
Kalle Kinnunen
Sustainability Manager, Funding and Sustainability
MuniFin will continue to focus on issuing strategic benchmarks in EUR and USD. The plan is to issue approximately 2/3 of the long-term funding through EUR and USD strategic benchmarks and the rest 1/3 through tactical bonds, which include other public markets (e.g., GBP, NOK, AUD) and private placements. Maturity target for the year will be slightly shorter compared to previous years, between 4–5 years.
MuniFin also aims to continue its commitment to issue green and social bonds next year. Sizes will depend on the underlying asset development of the customer financing portfolio.
In 2022, MuniFin has issued EUR 8.8 billion of new long-term funding and the program is nearly completed. This year MuniFin has issued three new benchmark transactions in EUR and USD, together with several EUR taps on the existing lines. Two of the strategic benchmarks were in EUR and one in USD. A new 7-year EUR 500 million green bond was issued in May 2022. In tactical funding, main currencies have been GBP and NOK. Allocation to tactical funding has been higher than planned this year and can be explained by market volatility in strategic markets combined with attractive opportunities in other markets.
The top 4 issuance currencies in 2022 are thus far EUR (39%), GBP (19%), USD (19%) and NOK (17%). These currencies account for 94% of the new funding issued in 2022.
On 7 October 2022, the European Commission approved the notification submitted by the Municipal Guarantee Board in cooperation with MuniFin and the Ministry of Economic Affairs and Employment, granting MuniFin license to finance Finnish energy companies owned by municipalities. The arrangement will ensure the continuity of municipal energy companies’ operations and strengthen Finland’s security of supply. This type of financing can only be used towards the collateral requirements in the electricity market. The Commission’s decision will be effective until 31 December 2022.
MuniFin can finance municipal energy companies in relation to collateral requirements only if they have a 100% municipal guarantee, similarly to other companies under municipal control. This requires the municipal council’s decision.
The Commission’s decision also allows municipalities to finance their energy companies out of their own budget under exceptional terms and conditions. This means that municipalities can now apply for a loan from MuniFin and then loan the funds on to a company, applying the same terms as specified in the Commission’s decision for loans granted directly to energy companies by MuniFin.
Financing needs are hard to predict
Anticipating financing needs arising from the collateral requirements in the electricity market is very difficult at the moment.
“It’s possible that energy companies won’t have much need for MuniFin’s financing after all. But because we don’t know how the electricity market will react when energy consumption soars in the winter months, we encourage municipalities and their energy companies to prepare for possible financing needs in advance”, says Aku Dunderfelt, Head of Customer Finance at MuniFin.
According to the scheme approved by the European Commission, the maximum loan amount cannot exceed either (i) 15% of the beneficiary’s average total annual turnover over the last three closed accounting periods; or (ii) the liquidity needs derived from the additional collateral requirements for the coming 12 months. The loan has a maximum maturity of three years.
Under the recently approved scheme, energy companies can use loans granted by MuniFin or the municipality only towards the liquidity needs arising from the increased collateral requirements in the electricity derivatives market. In other words, the financing cannot be directed towards investments in renewable energy or any other purposes.
Since the issuance of MuniFin’s first green bond in 2016, the sustainable bond market has been going through a lot of changes.
“The new framework has been developed to better address the current environmental challenges and to take new regulation, such as the EU Taxonomy and the proposed Green Bond Standard, into account”, says Sustainability Manager Kalle Kinnunen.
The new regulations have been used as guiding tools in defining the eligibility criteria. MuniFin has also mapped its project categories to the EU taxonomy activities.
“With this update, we now have firmer and more transparent eligibility criteria”, Kinnunen says.
The revision also involved some streamlining. There are now four project categories instead of seven: buildings, transportation, renewable energy as well as water and waste water management.
An important addition to the framework is the possibility to finance biodiversity and climate change adaptation projects. They were added as sub-categories.
“For example, green roofs or flood barriers, could have been financed as a part of building projects before but with this addition we wanted to facilitate such investments directly. In addition, the new framework allows us to provide more transparency on the impact of the projects”, Kinnunen explains.
These updates along with the strengthened internal resources allowed changes to the evaluation and selection process. In the past, MuniFin has relied on the external Green Evaluation Team, but now the evaluation and selection of green finance projects will be conducted by MuniFin’s own sustainability experts.
“This change would not have been possible without the years of valuable experience we have gained working with the external Green Evaluation Team. The new evaluation and selection process allows us to serve our customers more flexibly at the time of their financing needs. We will not compromise the scrutiny of evaluation and selection. On the contrary, the transparent criteria ensure the quality of approved green projects. As the market evolves, it will also be more straightforward to introduce additional criteria”, Kinnunen says.
MuniFin is open for dialogue with customers, investors and other stakeholders in order to enhance the framework and practices further.
“Our customers play a key role in achieving Finland’s goal of climate neutrality by 2035. Green finance is an important way to promote their green projects and we will keep adding ambition also in the future”, Kinnunen says.
External review
Cicero Shades of Green has provided an external review for the Green Bond Framework, including an assessment of the EU Taxonomy alignment. MuniFin managed to keep the Medium Green shading and even to raise the Governance score to Excellent.
There will also be an annual post-issuance review that confirms that the green bond proceeds have been allocated to eligible green finance projects.
The framework and the second party opinion are available here:
The effects of the Russian war on Ukraine have hit the Finnish economy slower than feared, but as the war drags on, it will inevitably affect the everyday lives of people more and more.
MuniFin’s Chief Economist Timo Vesala lists the reasons behind the economic downturn: “The positive developments in employment are grinding to a halt, and real wages are falling faster than ever since the late 1970s. Consumer purchasing power is taking hits from multiple angles at once: electricity bills and food expenses are skyrocketing and many people with a mortgage are facing manifold interest costs. Rising interest rates are weakening the prospects of the housing market and construction sector, and after a very busy period, the volume of construction investments is likely to fall next year.”
At the same time, the entire world economy has become significantly more volatile.
“The US and European central banks have signalled that they will keep raising interest rates for the time being, regardless of how fast growth expectations will fall. Judging by the ECB’s communication, it seems that its deposit rate will rise to approximately 1.25–1.50% by the end of the year. After rapid interest rate hikes, the rate of increase is expected to either slow down or even stop altogether next year if the economy slides into a deep recession. In any case, interest rate cuts remain unlikely until inflation has reliably returned to the target level of 2%”, Vesala explains.
Finland’s economy already in slight recession
Finland is likely to have already entered a period of mild economic recession. MuniFin’s economic forecast is based on a scenario in which Finland’s GDP will contract in the latter half of 2022 and the factors affecting demand will continue to weaken long into 2023.
MuniFin nevertheless maintains its GDP forecast for the ongoing year at 1.5%. The strong initial level of total production and the surprisingly good development in the first half of the year mean that the overall GDP growth in 2022 will be positive despite some negative quarters.
The year 2023 is expected to start with negative growth transferred from 2022, which significantly weakens expectations for GDP growth. MuniFin has therefore lowered its GDP forecast for 2023 to ‑0.5%. MuniFin expects economic recovery to begin in the second half of 2023, which will create a better starting point for the following year. MuniFin forecasts a GDP growth of 1.5% for 2024.
MuniFin’s estimate for the average unemployment rate for 2022 remains at 6.8%. Due to the economic downturn, it is estimated to rise to 7.4% in 2023 and settle at 7.3% in 2024.
Effects of the energy crisis impossible to predict
MuniFin’s forecast for Finland’s average rate of inflation in 2022 stands at 6.7%. The inflation peak will eventually subside as demand fades, but price hikes may not level out until next spring.
In Europe, the massive increase in energy costs combined with the weak euro are creating widespread upward pressure on prices, and the much-awaited decline in inflation is being pushed into the distant future.
“Electricity prices will be extremely uncertain in the coming months, which makes inflation difficult to predict. In the worst-case scenarios, the steep price of electricity can have a dramatic effect on consumer prices”, Vesala notes.
MuniFin prepared to offer financing to municipalities that own energy companies
MuniFin is also prepared for a rapid escalation of the energy crisis. Municipal energy companies are responsible for a significant part of Finland’s energy production, and their collateral requirements are a risk to the continuity of operations.
“We stand ready to offer financing to municipalities that own energy companies in order to ensure their continued operations. We will be able to meet the demand for funding even if it spikes significantly. We have always had a strong liquidity buffer and we increased it even more because of the Russian aggression. It is a precautionary measure for unexpected situations such as this one”, says Esa Kallio, MuniFin’s CEO.
Due to EU rules on state aid, MuniFin cannot, at least for the time being, finance municipal energy companies operating in competitive markets. MuniFin’s funding is therefore directed to the municipal owners of energy companies instead.
MuniFin’s funding is guaranteed by the Municipal Guarantee Board (MGB). On 7 September 2022, the MGB decided to submit a notification to the European Commission seeking for permission to use funding guaranteed by the MGB to grant loans to energy companies controlled by Finnish municipalities. This arrangement will strengthen Finland’s security of supply by ensuring that energy companies are able to keep operating despite the unusual circumstances. If the Commission accepts the arrangement, MuniFin can grant loans directly to the energy companies.
The Municipal Guarantee Board (MGB) will submit its notification to the European Commission in cooperation with MuniFin and the Ministry of Economic Affairs and Employment. The current circumstances in the energy markets have led to a situation where the supply of energy has fallen substantially, leading to sharply increasing collateral requirements on derivatives used by energy companies. This severely endangers the continuity of their operations.
MuniFin has already announced that it stands ready to quickly start providing financing for municipalities that own energy companies to ensure the continuity of energy production. So far, EU rules on state aid have mostly prohibited MuniFin from directly financing energy companies operating in competitive markets. Financing of municipal energy companies will be established based on MuniFin’s standard business model, and thus possible loans to energy companies will still require a 100% municipal guarantee, as is required for any other company loans by MuniFin.
“The spiralling collateral requirements in the electricity market and the reduced energy supply have together created a crisis and given rise to a need to ensure the availability of essential services for citizens. Under the circumstances, we consider the proposed arrangement to be in accordance with competition laws”, says Esa Kallio, MuniFin’s CEO.
Measured by its balance sheet, MuniFin is one of Finland’s largest credit institutions. It has been able to continue its international funding operations also under exceptional circumstances, for example during the start of the Russian war on Ukraine, the COVID pandemic and the financial crisis.
MuniFin has never recognised any final credit losses in its customer financing. The purpose of banks’ international capital regulation is to minimise the risks related to banking operations. MuniFin’s CET1 capital exceeds the ECB’s requirements by more than six times.
“It is difficult to estimate how long the Commission will take to process the notification. The timeline will also depend on whether the MGB or MuniFin will be required to provide further information”, Kallio notes.
MuniFin’s funding is guaranteed by the Municipal Guarantee Board (MGB), a public law institution operating under the Act on the Municipal Guarantee Board (487/1996). The MGB’s members consist of all municipalities in mainland Finland.
