Emerging Europe: Warsaw will go organic, says new CEO

Merger with Vienna ‘too complex’; regional listings in the spotlight.

The Warsaw Stock Exchange (WSE) is hoping to attract listings from companies across emerging Europe after abandoning plans for merger talks with Vienna’s CEE Stock Exchange Group (CEESEG), according to its new chief executive.

pawel tamborski-large
Pawel Tamborski, Warsaw
Stock Exchange CEO

Pawel Tamborski, who took over as head of emerging Europe’s largest bourse in July, tells Euromoney that, following a two-month strategic review, the WSE’s new management team has decided to focus on organic growth rather than pursuing a tie-up with its smaller rival.

While refusing to rule out a resumption of merger talks, Tamborski notes that teaming up with the CEESEG – which comprises the Vienna, Budapest, Prague and Ljubljana bourses – would be extremely complex. "It would involve four markets, four languages, four regulators and three currencies," he says. "We had to weigh that complexity against the potential for organic growth and the latter made more sense, for the moment at least."

Tamborski acknowledges that the WSE has lost momentum over the past year due to uncertainties over the reform of the Polish pension system, which saw policymakers appropriate a large chunk of the second pillar pension funds, previously among the most active investors in Warsaw, to plug holes in the state budget.

Nevertheless, as he notes, the fact that 15% of working Poles opted this summer to stay with the private pension system means the funds will still be able to support Warsaw’s capital markets development.

"The pension funds have survived and will be cash positive for the foreseeable future. They might not be as active as they were before, but there is no fire sale coming. This is a very good signal for us and provides us with an excellent opportunity to approach potential listing candidates and investors, and tell them that Warsaw is back in business."

Getting message across

Tamborski is particularly keen to get that message across to firms in other central and eastern European (CEE) economies. "We would like to be the market of first choice for companies in our region," he says. "Warsaw can offer access to almost every emerging Europe investor, as well as to Polish capital from the pension funds, a rapidly expanding mutual funds sector and a very active retail sector."

This strategy of targeting regional listings echoes that of Ludwik Sobolewski, who headed the WSE for seven years before being hit by scandal and forced to resign in January 2013. As a result, Warsaw already has a strong foreign presence. Fifty companies from 23 countries are listed on the WSE’s main market and account for 31.5% of its total market capitalization of Z902.1 billion ($267 billion).

Not all foreign firms listed in Warsaw have fared well. The WIG-Ukraine index, comprising 12 companies from Poland’s south-eastern neighbour, has lost four-fifths of its value since its creation in 2011. Tamborski says the WSE has no plans to close its office in Kiev – however, he adds ruefully: "Ukraine is a country with huge potential – unfortunately this has been true for at least the past 15 years."

With regard to primary equity supply from Polish sources, Tamborski is cautiously optimistic. He notes that, while the country’s long privatization process is coming to an end, there is still a pipeline of potential public sector transactions. Poczta Polska, the Polish postal service, is due for a long-awaited IPO and the country’s new infrastructure fund, Polish Investments for Development, is also expected to raise capital regularly via the public markets.

Tamborski is particularly well qualified to comment on the privatization process, having overseen it for two years as under-secretary of state at the Ministry of Treasury before moving to the WSE.

Demand from pension funds, mutual funds and
private individuals could spark dynamic development
in the corporate bond market

Pawel Tamborski

In the private sector, meanwhile, a number of Polish companies set up in the immediate aftermath of the collapse of the Soviet Union are at the right stage of development to explore listing options, says Tamborski. "After 25 years of a free market economy in Poland, we are approaching the point when family companies are entering a new generation, which is typically when they could start looking to list."

Overall, he says, the WSE has identified 200 Polish firms that are large enough and sufficiently developed to list. For 2015, however, Tamborski is hoping merely to match this year’s expected total of 40 IPOs, but with a higher proportion of large cap listings and fewer on the exchange’s junior market, NewConnect.

He is also keen to encourage companies already listed to increase their freefloat. "The current figure of 47% of domestic market capitalization is much too low," he says.

Equities are, however, not the only focus of the WSE’s new management. Tamborski also cites commodities – which account for one-third of the exchange’s revenues – and derivatives as key areas for development, as well as information provision.

He is also bullish on the outlook for Catalyst, the WSE’s trading platform for corporate bonds. The market has been quite slow to develop in the five years since the platform’s launch but a combination of low interest rates and changes to the regulations governing pension fund investment are driving a pick-up in demand for corporate bonds.

"Polish pension funds are no longer allowed to buy Treasuries, which makes them a natural source of demand for good quality debt instruments from the corporate sector," he says. "Smaller transactions have also been very popular on Catalyst this year due to demand from active private individuals looking for a better return than bank deposits.

"The combination of demand from pension funds, mutual funds and private individuals could spark dynamic development in the corporate bond market in the next few months."