Municipalities on shaky financial footing are having hard time securing funds through bond markets.

A bad credit rating hurts.

Home loan applicants know it. So do businesses. Now, local governments trying to raise funds in the bond market are also experiencing the sting of rejection.

The Osaka prefectural government asked banks and brokerages this summer to lower the underwriting fee for its bond issues.

Prefectural officials expected a good hearing. After all, the Tokyo metropolitan government had successfully negotiated a lower rate.

Response? Fuhgetaboutit. The banks and brokerages said Osaka's finances were in poor shape. Ushering the prefectural officials to the door, the stony-faced underwriters said they needed protection against a plunge in future bond prices.

Ouch. But Osaka is not the only one that needs to develop a thick skin.

As central government funds dry up, private-sector players are taking over as the main buyers of local government bonds.

This has forced local authorities to wake up to a tough reality. Investors prefer securities issued by those on a strong financial footing.

In the past, credit ratings weren't an issue. The central government channeled large amounts of money from postal savings and life insurance to buy local government bonds, whose outstanding value totaled some 140 trillion yen as of the end of March.

This created a uniform market. Underwriting fees were the same across the country.

But this is changing as the central government turns off the funding spigot.

In the current fiscal year, the total value of new issuances taken on by private-sector investors-including bonds issued to designated banks-will exceed the amount underwritten by government-related funds for the first time.

For municipalities in weak financial positions, it means higher costs to raise funds.

Publicly offered bonds are underwritten by syndicates, or underwriting groups formed by institutional investors such as banks and securities houses.

The underwriting fees for publicly offered 10-year local government bonds-which had been a uniform 75 yen per face value of 10,000 yen until fiscal 2001-have been divided into three levels: 32.5 yen, 38 yen and 48 yen.

The prefectures of Osaka, Hyogo and Hokkaido, and the cities of Osaka and Kobe, pay the highest rate.

In addition to Tokyo, Aichi, Saitama and Chiba prefectures and Yokohama pay the lowest fee.

That means for a 100 billion-yen bond issue, Osaka Prefecture has to pay up to 155 million yen more than Tokyo in underwriting fees alone.

Similar disparities are appearing in bond yields.

Yields on Tokyo's 10-year bonds have been staying at about 0.05 percentage point higher than central government bonds. By contrast, yields on the Osaka prefectural government's 10-year bonds have been running at 0.15 percentage point higher than central government bonds.

If investors anticipate that long-term interest rates will rise, prices of unpopular local government bonds could tumble, pushing up yields and making it difficult for some local governments to raise funds in the market.

Faced with more intense scrutiny, some local governments are stepping up efforts to brief investors on their financial positions.

At a recent briefing by the Kobe municipal government, the first such session for the city, officials explained a restructuring program in the rigorous fashion expected of a private-sector company.

The program, presented to some 110 officials responsible for investment at life insurers and securities houses, included a cut of 3,000 jobs from its payroll and reduction in the amount of outstanding municipal bonds by 500 billion yen over the next seven years.(IHT/Asahi: December 1,2004)