Author: Bednárová Jana
Source: Trend, 3.7.2008, No. 26, page 66, Printed with Publisher’s Consent
Last month, the IT company Asseco Slovakia released its second issue of stocks on the Warsaw stock exchange. This issue netted nearly SKK one billion, which will be used for acquisitions abroad. The Secondary Public Offering (SPO) process lasted more than five months. Demand at the fixed issue price of 30.50 PLN exceeded supply by 20%. “Despite this being one of the most difficult times for us, it is very important for us to grow, so we decided to go for it,” said the Director General of the Jozef Klein company.
It sounds almost too good to be true. However, Asseco is an exception and although the Warsaw stock exchange announced that another, as yet not specified, Slovak company may announce an Initial Public Offering (IPO) at the end of the year, this is where the transformation of a fairy tale into reality comes to an end. It will still become only the second company to announce a flotation, with Sky Europe, which went to Vienna, as a third. The under-developed stock market in Slovakia is the reason why local companies are not interested in raising capital in this way. With a few exceptions, they make do with bank loans. There have also been very few bond issues by non-financial institutions. As a consequence, all the contingent business such as investment banking is also performed in a limited way. It is not worth offering the usual range of services from merger and acquisition consultancy to consultancy with regard to raising capital on the stock exchange.
Money has become harder to attain. The credit crisis which has been affecting the markets for almost a year has also influenced developments in Slovakia. The impact is, however, completely different from other parts of the world where investment banks have faced bankruptcy and the financial sector has had to write off 400 billion dollars of assets. The crisis has had no impact on the merger activities of companies and raising capital on the market. However, there are consequences; investors are more selective and the price of resources has increased.
The solution is a shorter maturity, even for mortgage certificates secured by real estate as well. These are, together with state bonds, the most frequent issues in Slovakia. Last year, VUB (the bank “Všeobecná úverová banka“) managed to sell 30-year mortgage certificates. Nowadays this would be unthinkable. “The banks believe that the situation on the financial market will improve within three years. They are issuing bonds with a shorter maturity” says Tomáš Pavlák, Head of the Treasury Division of “Slovenská sporiteľňa“(SLSP).
“The banks are required by legislation to issue mortgage certificates but there is nothing obliging companies to issue bonds. They are content with bank loans. A bond issue, compared to obtaining a loan, is a more complex process. It has to be registered, reported,” says Patrik Mozola, Head of Corporate Banking at HSBC. But there are advantages also. When applying for a loan, the company has to comply with the pre-determined financial criteria. In the majority of cases there is no such direct obligation on the issuer. If the creditor is not satisfied with the financial situation of the issuer, he can sell the bond. This is another problem facing the Slovak market – there are too few players and bonds, and liquidity is low.
Tailored issues: Large companies abroad issue bonds to diversify their resources. They issue shares in order to be able to expand and take on further credit and issue further bonds. According to an analysis by Erste Bank, Euro bonds available on the primary market in May amounted to EUR 20 billion. Activity has picked up once more after some slow months. A survey conducted in April by the European Central Bank found that banks have further tightened their policy on credit, especially with regard to large companies. As a consequence, the capital market is growing in importance as a source of financing. However, it will not be necessary to compensate for the total amount which the companies would otherwise borrow from the banks because their investment activity is decreasing and they are spending correspondingly less.
The debt issues of private non-financial companies in Slovakia are in single-digit numbers and amount to hundreds of millions of Slovak crowns. A more active approach in investment banking has been adopted by Privatbanka. Since becoming a part of the Penta group last year, it has prepared three issues for projects of the group and sold them to its private clients. The first issue was of bonds for the Bratislava project Digital Park, followed by bonds for the Polish retail chain “Žabka“ and currently there is a further real estate housing project on the outskirts of Bratislava. Although all the issues, the first of which was executed in July last year– immediately prior to the outbreak of the crisis, were on an 8% coupon, the bank has noted a change in the bond prices. When a client lends at less than the par value, ie. the client buys for less than the market value, his actual yield is understandably higher. Thus the Digital Park was sold at 101% of the par value, Žabka at 100% and at present the real estate project Boháčky is at 99% of the par value. The Žabka bonds were on sale for two months, unlike the Digital Park, which sold out within two hours with demand being twice as great as supply. According to the Director of Private Banking, Michal ubín, there are other reasons for a stronger demand for Digital Park: at that time real estate was hot and it was a smaller issue; besides, Žabka is an unknown brand in Slovakia.
Although the crisis has increased additional risk charges, good clients are still welcome in banks in Slovakia. There remains a surplus of liquidity in banks. However, for companies with poorer financial ratings it may be more difficult to obtain credit. Head of theTreasury Department of Privatbanka, Miron Zelina, says it could spark their interest in bonds. “Although,” M. Zelina states“ it’s questionable how much use the companies will make of this opportunity “.
Just trivia: The currently higher interest rates could also deter issuers. A floating interest rate could be the solution. By the look of other issues, however, it appears that at present the 8% coupon is more popular. It was included not only in the Privatbanka issues but also in the Arca Capital Group or Across group. The Arca Capital group used the SLSP as consultants on the issue although the issuer had several banks to choose from. “Experience with issues of a similar kind was a decisive factor” explains Arca Capital spokeswoman, Monika Dobrovodská. According to her, they try to diversify their resources when financing activities. The advantage of bond issues is that the resources obtained in this way can be used in projects such as equity financing. This year, in their third issue, they acquired more than SKK 200 million. They do not rule out further issues.
A similar approach to Privatbanka is used by Across. They need to finance projects and clients need to invest. As of May, they are acting as an intermediary for an issue of new bonds for one of the companies of the group – this is the fourth in a row, with a total value of SKK 300 million and at three years’ maturity. This year bonds have also been issued by Matador. A week ago they were listed on the Bratislava stock exchange together with the Arca bonds.
The statistics already look better than last year, when there was only one non-state and non-financial item – I.D.C. Holding bonds. The Czech company CE Wood is also a newcomer on the market. Trading in both non–state bonds and shares is negligible.
Marek Gombita, Financial Director of I.D.C. Holding explains that it is hard to tell whether a loan or a bond is preferential. “The advantage of bonds is that they are a long-term investment and the conditions we have to meet are the same with each issue. With loans, the outcome can be that we negotiate different terms with each bank,” describes the experience of a company with four bond issues currently on the stock exchange.
Waiting for the Euro. The Euro could help with bonds. There will be new opportunities for investors, they can first try any stocks and bonds in EUR and then they could be more interested in domestic issues. If domestic issuers show interest, things could start moving. Obviously, only if the mood is not blackened by the inability of one or more of the issuers to redeem the bonds.
T. Pavlák from the SLSP suggests that, within the Erste Bank group, Euro-bonds could be offered to a large number of potential investors in several EU countries. Due to this, he anticipates an increased interest in bond issues. “Increased interest can be anticipated on the part of foreign investors because they will not be faced with an exchange rate risk,” he says.
According to Patrik Mozol from HSBC, there are several reasons why the price of loans and consequently the interest in bond issues could grow. The new Basel rules, decreased income
for banks from foreign exchange operations following Euro-adoption. They could add up to a change in the situation, which has not, to date, been substantially affected by the crisis itself. He points out that those Slovak issues are small with low liquidity and become attractive only at the level of 100 to 150 million dollars or EUR.
“One of the essential conditions for a successful issue of company bonds will probably be the issuer’s rating,” stresses T. Pavlák. “The investment rating is a restriction which also limits pension and share funds. They manage tens of billions of Slovak crowns but they cannot invest as they wish. Companies with no rating issuing bonds would not be able to buy or with only major restrictions. Companies that acquire an investment rating already have access to interesting credit conditions.”
