As the Finnish economy recovers from recession, local attitudes towards capital markets are changing. The switch is likely to provide a boost for Finnish equities at the same time as reducing the range of opportunities for participation in debt financing. The move from debt towards equity goes right to the top.
The Helsinki Stock Exchange (HSE) has experienced a resurgence of activity, spurred by privatization and a growing internationalization of trading in Finnish equities.
The recovery in the Finnish economy (turnover on the HSE official list in 1996 reached a record high of Fmk101.3 billion or $19.5 billion) has been as strong as the recession was deep. Despite recent volatility – the HEX index fell from a peak close to 3000 in early March, and is now trading at around 2800 – overall volumes held up through the first quarter, although they have slackened off more recently. However, the fall-off seems more likely to be a reaction to worldwide uncertainties, while rises in recent years reflect the underlying strength of the economy.
Stephen McClintock, outgoing managing director of Citibank International in Helsinki, has a decade of experience of primarily cross-border business with Finnish corporations. He describes the Finns as “sophisticated buyers of financial products who have learnt some hard lessons about capital markets from their recession”.
Visit the boardrooms of Finland, and you’ll be told that the biggest lesson companies have learnt is that “debt can be dangerous”, as one finance director put it.
The Finnish recession was triggered by uncontrolled lending by the banking sector. This was largely attributable to the Finnish government’s system of loan guarantees (since withdrawn, although the withdrawal has not yet been tested by a banking collapse). The result is an increased emphasis on equity financing.
The big companies now speak of strengthening their balance sheets in the short term. If – and they stress if – they have any future borrowing requirements, they say they will be in a buyer’s market, and capable of putting serious pressure on margins.
Pekka Holtta is corporate treasurer of the Valmet Corporation, a recent big name to come to the market, whose shares now make up 2% of total market value of the HSE and a little over 3% of turnover. “At the moment the company is rather well equipped with finance,” he says. “We are a cash-positive company and I suppose the best opportunity is simply to buy our shares.”
Finland’s economic strength (the country already meets the criteria for entry to the single European currency), combined with the success of recent privatization issues, has persuaded the biggest player in the Finnish debt market, the Republic of Finland, temporarily to place on hold all its plans for future debt issuance. The republic has forecast a net zero foreign borrowing requirement for 1997, 1998 and 1999, although it began this year by issuing a £150 million three-year bond and a Sfr150 million five-year bond. Forecast repayments exceed borrowing in 1997 and 1998, and there is a balance in 1999.
Inga-Maria Groen, financial counsellor at the finance ministry, says: “Our currency is strong, and our reserves are high enough for us not to have to take in any international borrowing. I would not be able to say that the present situation will continue for the rest of the year, but I will say that we are discussing the whole of our borrowing requirement at present.”
The recent renewed activity on the HSE has been the result of privatizations, including that of Valmet. But there have been other factors affecting the stock exchange.
Juhani Erma, president and CEO of the HSE, says: “The operating environment continues to change and bourse operations are becoming increasingly international.” He foresees competition for his exchange. “Opening up frontiers means an open competitive situation among stock exchanges on the one hand and between other marketplaces on the other.”
Last year was the HSE’s first full year as a private limited company and, although the opportunity represented by commercial independence has been seized, with an “overhaul of strategy and operating principles” and a heavy investment in technology, the resultant international accessibility of Finnish equities is a double-edged sword.
Erma puts the domestic perspective. “The competition is in early stages yet and will certainly get tougher. However, a national exchange still has an important role to play. Local services and expertise are needed to ensure that Finnish companies get the capital supply they need and that investors’ interests are also taken into account.”
Heavy hitters
However, the picture looks different to outsiders. For example, Finnish electronics company Nokia’s shares are listed on Nasdaq. At the same time, as of end-1996 Nokia accounted for more than 20% of HSE’s market capitalization and more than 30% of turnover. Finnish market leadership in communications technology may not work to the HSE’s advantage.
And the HSE is very narrowly based. Finland has some large export-led corporates but most listed companies are smaller and less cost-efficient domestic firms. The HSE is dominated by the minority of large companies. Last year’s privatizations, mergers and new listings – among them Valmet, UPM-Kymmene and KCI Konecranes International – account for around 15% of turnover (thus 45% with Nokia), with only 26 of the 71 companies on the HSE official list accounting for more than 1% each of turnover. A listing requires share capital of Fmk10 million and shareholders equity of Fmk20 million, while the 31 companies on the OTC market are required to have only a tenth of those figures.
And yet the foreign-owned component of the HSE’s market capitalization rose by Fmk45 billion to Fmk108 billion in 1996; not quite a doubling, but perhaps a sign that Erma is right to argue the value of local know-how.
Brokers on the HSE include a number of local and not-so-local names, among them Alfred Berg, Den Danske Bank, Svenska Handelsbanken and Williams de Broé as well as Merita, Postipannki and Evli Securities (which suggests it might be premature to write off the Nordic bloc, despite member countries’ differences over Europe).
The HSE’s members will soon find competition for business within Helsinki hotting up, as well as competition between Helsinki and other centres. Increasing foreign interest might also be auspicious for the HEX index; the likely advent of trading in euros in 1999 is another eagerly awaited development.
With the increased emphasis on equity financing the prospects for future share issues and privatizations must be good.
Serious player
Like other large Finnish corporations, Valmet emerged from the recession with a clear focus on its core activities. The company has sold many of its non-core subsidiaries, and sees its future in terms of “maintaining global leadership”. Corporate treasurer Holtta speaks of Valmet as “providing the R&D function to our customers worldwide”. He adds: “We are a very serious world player, and in any serious international project, we would be one of very few companies able to compete.”
He is not in the market for money, although his company’s ambitions suggest he might be in future. Valmet provides papermaking machinery in Europe, North America and Asia; it is building a technology centre in Thailand to be opened this year, and has recently established a sales operation in Chile.
The company’s share performance is also positive, although that is not of direct benefit to Helsinki’s brokers. Valmet obtained a new York Stock Exchange listing in mid-1996, and its earnings per share went up from Fmk6.74 in 1995 to Fmk10.26 in 1996. Its market value at the end of 1996 was Fmk6.4 billion. The current share price in Helsinki is around Fmk88.50. Valmet is characteristic of the larger end of the Finnish corporate sector which is composed of niche players dominant in their world markets.
There are solid grounds for believing that a substantial tranche of steel giant Rautaruukkis’s shares may soon come onto the market. The Finnish government has appointed SBC Warburg and UBS as advisers to assess the feasibility of such a sale. Although no date has been set (and there is no official confirmation that a sale will take place) Rautaruukkis’s vice-president of financing and legal administration, Ilkka Arjaluoto, notes that the international steel price has begun to rise and that this may prove an attraction for potential shareholders. “We are the only company in Finland to which any rumour of privatization has become attached at present,” he adds.
The government holds a 68.66% stake in Rautaruukki, amounting to just over 82.5 million shares (the March annual meeting authorized a rights issue of up to 15 million shares). Market capitalization at the end of 1996 was Fmk5,110 million. The government would not reduce its stake to less than 33% of shares outstanding, so that more than a third of the company might come on to the market.
Rautaruukki shares traded in a range between Fmk25 and Fmk45 in 1996, significantly underperforming the market, with the best price at the end of the year, coinciding with the bottoming-out of the steel price. Informed speculation suggests the ideal time for a sale would be late summer. Such speculation, comments a local banker, is “not necessarily accurate, but all part of the fun of a Finnish privatization”. Rautaruukki’s current share price is around Fmk44.50; this is approximately a mid-price for the year, with a high in the early 50s and a low around 30.
One local analyst, speaking of privatization in general, was perhaps exaggerating when he suggested: “The government does not really see itself in the capital markets in any significant way in future. It is not a corporate, and it is not in business to make a profit.” He added that the government seemed to be “looking for an exit somewhere in the equity markets”. The Finnish government’s financial position supports the view that the privatization share price for Rautaruukki will be set to encourage the sale rather than to raise money.
The Rautaruukki sale is unlikely to be the last privatization in Finland. The Finnish style involves the sale of part holdings; there are no wholly state-owned Finnish corporations and, in the short term, the Finnish government is retaining minority stakes in the companies that it privatizes.
One consequence of this is that the corporate sector in Finland is closely networked; while privatization offers an opportunity for participation, the downside is that Finland is, if not a closed shop, at least a market with the door only slightly ajar.
At Rautaruukki, Arjaluoto is looking forward to a wider choice of institutions for his future financing, and narrower margins. But significantly, he speaks of the “convenience of dealing with somebody who has a local office”.
At Okobank, director of treasury and capital markets Kari Kukka talks of “cooperation not competition” with foreign institutions and, like Erma at the HSE, places an understandable emphasis on the advantage of being local. “We have the contacts and the outlets in Finland, and we have the links to small- and medium-sized business here,” says Kukka. Perhaps ingenuously, he adds: “Who would be interested in Finland?”
So the challenge is to participate in capital supply via equity financing in a market that is only half-open and accustomed to dealing with its own members.
McClintock, one of the few international bankers to have kept a substantial presence in Finland, describes his approach: “We have pursued a cross-border strategy for seven years. Back then we were working with Finnish corporations in eight countries; now it’s 42. Our strategy is to provide all the support we can outside Finland rather than compete with domestic banks in the domestic market where we do not have an advantage. More than 35% of our revenues are generated outside Finland.” Success came not from being in Finland, but from representing an international facility.
