Town to Issue Death-Backed Cemetery Bonds

This dusty agricultural village in southwest Sicily is facing a deadly dilemma: its cemetery is almost full, and will run out of funeral berths within 12 months.

Mayor Giuseppe Bongiorno needs 5 billion lire ($3.3 million) to build a new graveyard. Yet, instead of asking the government for the money, as municipalities have done for years, Bongiorno’s town is issuing bonds--death-backed bonds.

Castelvetrano, which calls itself Italy’s olive oil capital, will raise the money in an issue of buoni obbligazionari comune, or BOCs, by September. Interest and principal payments on the bonds will be made using revenue from the purchase of four- and 10-person tombs and funeral berths by the town’s 30,000 citizens.

Though small, Castelvetrano’s 6-billion-lire bond issue is emblematic of the fervor with which Italian cities, regions and villages are taking to a law passed earlier this year allowing them to tap capital markets for financing.

“Mayors and politicians are convinced that these issues are the best solution to dwindling federal monies and increasing autonomy,” said Mauro Cicchine, chief executive of Crediop, Istituto Bancario San Paolo di Torino SpA’s investment bank.

While the $200-million Yankee bonds issued by the city of Naples last month grabbed headlines, bankers and investors say the creation of a municipal bond market rests on smaller issues by towns like Castelvetrano, Forli and regions like Piedmont.

“Most of these kinds of issues will be small, as the projects they are backing are small-scale,” said Niccolo Nuti, head of capital markets at Credito Italiano SpA.

Cicchine estimates the entire market for Italian municipal bonds will reach 2 trillion to 3 trillion lire by the end of next year. In 10 years, he said, “the dream will be to have a market similar to the one that exists in the U.S.”

By offering freedom from central government financing, municipal bonds feed into Italy’s history as little more than a collection of independent city-states, some of which, until 130 years ago, warred with one another.

Though that makes it less likely that a Neapolitan investor will bet his savings on Turin municipal bonds, it lets cities tap their citizens for cash. Given that Italians save some 15% of their annual salaries, that’s no small pool of capital.

That is why Castelvetrano offers at least one-quarter of its bonds to local residents. Individual investors will be solicited through advertisements in the city, dubbed “la generosa” by the revolutionary Giuseppe Garibaldi for the help Castelvetrano folks gave him in unifying Italy in 1860.

“This is a way to bridge all the savings our citizens have with the idea that they are investing not in some company or project that drains resources from here, but in something they can actually participate in,” said Bongiorno, Castelvetrano’s mayor.

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Bankers hope to launch handfuls of similar bonds, which are backed by revenue from specific projects like the Castelvetrano cemetery, or, say, a parking lot, rather than a city’s general tax revenue.

By building resources within their towns, the bonds are seen by politicians not only as a way of managing dwindling resources, but of burnishing their images as well.

“There is a social goal behind these issues, not just a yield,” said Credito’s Nuti.

Though the Castelvetrano bonds are not officially a revenue-backed bond because the town still is liable for coupon payments to investors, it is the closest thing to one yet issued in Italy.

“It is a pretty good idea--though, if people stop dying, or whatever, they have to come up with the money,” says Remy Cohen, a former Treasury official who is now Bear Stearns & Co.’s banking representative in Italy. “The repayment is the general obligation of the city of Castelvetrano.”

Even so, Castelvetrano Assessor Giacomo Scozzari said he expects the town to pay down its 10-year bond five years early, based on demand for tombs. That’s why the town plans to use part of the money raised to finance water and sewer improvements to a local tourist site on the Mediterranean.

According to Castelvetrano’s 15-page financial plan, the new cemetery will cover 21,000 square meters, with two-thirds of the space going toward parking. Total building and materials cost is about 5 billion lire.

The cemetery will include 320 “colombari,” or single-body tombs, stacked one atop another, with plaques on the outside. The town expects these berths to sell out within eight years, raising about 384 million lire.

The tombs will cost 1.2 million lire each; for that, the deceased is assured a resting place for 30 years, after which families either renew their contracts or the remains of loved ones are put into communal graves, as is the Italian custom.

“Cemeteries are a real good business in Italy,” said Cohen, the Bear Stearns investment banker. “There are fees involved in every death and they take the bones or ashes away every few years, opening up new space.”

The largest source of revenue will come from selling mausoleums, which come in two sizes, four-person and 10-person. The city will build 156 chapels containing four resting places and selling for 8 million lire each, for a total of 1.3 billion lire. These will sell fastest, with all gone within three years, according to the plan.

The biggest moneymaker will be larger mausoleums, which cost 30 million lire each. According to the town’s financial plan, all 124 of these chapels will be sold in five years, bringing in 3.7 billion lire for the town.

Unlike funeral berths, which turn over every 30 years, loved ones’ remains stay in mausoleums for 99 years. After that, their descendants decide whether to renew the funeral contracts or put the bones in communal graves.

Critics of the kind of small municipal bonds Castelvetrano is selling warn that bondholders will have a very difficult time selling their investments if they need cash. Although more than a quarter of the bonds will be sold to Castelvetrano locals, the rest are likely to wind up on Crediop’s books.

Moreover, the bonds, which will yield no more than 50 basis points over the Rome interbank offered rate, now at 8.93%, carry no government guarantee. That means if the project fails to meet the numbers projected by the city, or if the funds are mismanaged, investors wind up holding the bill.

“It’s not a problem,” said Castelvetrano Mayor Bongiorno.

“We can practically guarantee this issue, because there are only a few certainties in life, and one of them is death.”