Loans from KBN when municipalities merge
Some of our customers have been wondering what will happen to their loans from KBN when their municipality becomes part of a larger merged municipality.
The text below is a short guide that we hope will answer some common questions.
The principle of continuity
The overall principle that will be applied when municipalities merge will be continuity. In other words, the new municipality created by the merger will automatically take over all the old municipalities’ agreements, together with all the rights and obligations these entail. With regard to loans from KBN, this means that the new municipality will take over all existing loan agreements, and the existing interest rate terms will apply unchanged. Loan numbers will also be retained. The same principle also applies to all guarantee obligations issued by municipalities.
KBN will send all the new municipalities a letter containing an overview of all their loans and guarantees as soon as possible in the New Year. This letter must be signed and returned by the municipality’s mayor or by another individual with sufficient authorisation. This will provide KBN with confirmation from the new municipality that it is aware of its liabilities to KBN.
Remember too that any ownership interests that municipalities have in inter-municipal companies or private limited liability companies may change, and that municipalities are required to provide us with such information. Please therefore send us any new company agreements as soon as they have been re-approved.
Instalments and unused credit facilities
Instalments that fall due in 2019 must be paid in 2019 by the old municipality.
Where an instalment falls due in the New Year but the interest expense is to be divided between the old and new municipality, the instalment must be paid by the new municipality. The annual statement that KBN sends out at the start of January will be the basis that municipalities have for allocating the costs between the old and the new municipality if necessary. If a municipality has been granted a loan but has not yet drawn down the entire amount, this must be done before the New Year. Alternatively, the amount granted can be reduced such that the unused part of the facility is removed before the merger.
Tips for the period before merging
To the extent possible, it may be appropriate for municipalities to co-ordinate their portfolios of loans before merging in order to map the consequences of, for example, their existing fixed-rate agreements, instalment structures and maturity structures. KBN Finans will be a useful tool for this. If you envisage thoroughly reviewing and restructuring the new combined portfolio once your municipality has merged, it may be appropriate to take out any new loans on floating rate terms and to allow any loans on fixed rate terms to switch to floating rate terms. This will provide you with greater flexibility, which will make restructuring the portfolio easier. Due to the high level of activity we expect to experience in November and December, we ask that you make any changes to your current portfolio in the first half of November.