Three key factors govern the progress of central Europe: the unbundling of a cumbersome and inefficient state-enterprise system, the bringing to market of privatized companies and the endowment of that market with a sufficient degree of transparency and liquidity to attract western capital.
Nearly half of the new democracies can each boast a private sector which accounts for more than 50% of GDP. Some countries have mapped out highly ambitious privatization plans. Hungary, for example, wants to boost the level of privately-owned enterprise to 75% of GDP from a present 56% within the next two years.
But investors complain that all too often the ghosts of the old regimes make their presence felt in a slow-moving and often suspicious and corrupt bureaucracy. As a result, living standards languish at about one-third the level of those in western Europe. The European Bank for Reconstruction and Development (EBRD) points out that for the next 25 years central Europe will need a growth rate of 3% above that of western Europe to bring living standards to two-thirds of those enjoyed in the west. That can only be achieved by attracting foreign investment.
Western capital will play a dominant role in central Europe’s fledgling markets. Pension fund managers in the US, for instance, say that the 7% to 8% of their assets currently invested overseas will rise to perhaps 15% by the end of the decade. Emerging markets will be allocated about 10% of those assets, which in total amount to some $6 trillion.
For the present, the liquidity of central European stock markets is problematic. “The level of liquidity is such in some countries that from a trading standpoint it makes for hard work,” says John Parker, head of emerging-market equity sales at Salomon Brothers in London. “The process needs to be faster. There will be new issues in Poland in the next 18 to 24 months and this seems to be the market for substantial equity issuance. We expect to be part of that process, but at the moment there are fewer than 40 companies quoted on the exchange.”
Poland, with 40 million inhabitants, overshadows its central European neighbours and has been one of the region’s most powerful magnets for outside capital, attracting almost $4 billion in direct foreign investment in the past five years. It is implementing a state-managed privatization programme through the vehicle of 15 investment funds set up by the state. The allocation of 413 enterprises to these funds is being carried out by selection rounds in which each fund manager can choose individual companies to be included in the portfolio. The idea is to ensure effective governance of enterprises and funds.
The region’s other dynamic market, the Czech Republic, took a free-market approach. It allowed the rapid creation of private investment funds, which facilitate and promote outside ownership and governance of companies in the mass-privatization programme.
“The jury is still out as far as restructuring and corporate governance is concerned,” says Susanne Gahler, emerging markets economist at JP Morgan. “We will only know in three to five years’ time whether the Czech Republic or Poland has provided a more effective model to create efficient and profitable units.”
A drawback Poland faces is a long delay in getting its programme off the ground. The investment funds, which are joint-stock companies owned by the Polish treasury, began distributing vouchers only last November.
Foreign investors have been less than impressed by the way the Polish government has handled the privatization of the banking system, one part of the programme already under way. Nine banks were separated from the state banking system to clean up their balance sheets and recapitalize them before privatization. All were scheduled to be placed in the private sector in 1995. So far only three have made it and the government wants to bring back one of them into the state system.
Response from foreign investors to the 1995 flotation of Gdanski Bank was also less than enthusiastic. The transaction, jointly lead-managed by HSBC’s James Capel and Daiwa (with SBC Warburg, Schroders and Creditanstalt as co-managers), was the largest international share offering yet from the Polish market and the first to use international equity-marketing techniques. But it ran into a considerable degree of investor resistance. Last month, the government was quick to assuage investor anger by promising to abolish a 30% restriction on foreign ownership of domestic banks.
Poland cannot afford the luxury of an ambivalent policy on market reforms. “Revenues from enterprise and bank privatizations are a critical component of solving Poland’s social security insolvency problem,” says Stuart Brown, Paribas Capital Markets’ senior economist for emerging markets. “Moreover the social security issue is one of the key factors in helping to balance the budget and bring down inflation in the medium term.”
Hungary’s policy has been more intuitive, according to Gahler. “The Hungarians benefited from direct foreign investment and sold a lot of good companies in the market,” she says. Still, the Budapest Stock Exchange is thin on issues and one big purchase order can have a dramatic impact on the index.
“Hungary has been more selective than some of its neighbours,” says Steven Fries, an economist for the EBRD. “They have been engineering cash sales to strategic investors to ensure good governance of privatized companies from the outset. They have also been quite aggressive in selling off state enterprises.”
So far the Hungarian government has placed into the private sector assets equivalent to more than half of the country’s GDP. More than $1.6 billion in foreign portfolio investment has been channelled into the market in the past four years. The government is taking the view that privatization through direct cash sales provides the know-how, management and marketing capability that cannot be achieved with a voucher programme.
“You need cash sales,” says a Hungarian banker. “Investors bring in an international culture and links to the market. Changing a company’s ownership is only one step in the process. What is really crucial is injecting the know-how required to run an enterprise efficiently and profitably.”
Last year Hungary achieved the biggest-ever offering out of central and eastern Europe with the sale to international portfolio investors of a 25% stake in the major oil and gas company MOL (Magyar Olaj-es Gazipari). The transaction, lead-managed by Merrill Lynch, Kleinwort Benson, Lazard Brothers and Creditanstalt Securities, raised $150 million.
The Czech Republic’s mass-privatization plan has spawned the largest proportion of shareholders per capita in the world, with some 60% of the country’s 10 million people participating in the coupon system. The financial markets are supported by a high level of economic credibility. Last November this earned the Czech Republic an upgrade by Standard & Poor’s to A from BBB+,
higher than Greece. This is good news for the privatized companies, which will see a welcome reduction in their borrowing costs in a year when a high level of activity is expected in corporate restructuring and mergers and acquisitions.
Although the government claims that the Czech Republic has advanced beyond the transitional stage, sceptics are wary of a lack of transparency in the stock market which is dominated by local investment funds. These were set up by the government as part of the voucher-system privatization programme and many of the top Czech banks hold shares in them. The banks are also creditors to many of the companies partly controlled by the funds. This raises worries that the banks could easily hide bad loans at companies in which they hold an interest.
Nevertheless, impressive strides have been made to develop a western-style market economy. The government claims that 80% of Czech GDP already comes from the private sector. The Prague Stock Market has the highest ratio of capitalization to GDP in the region (43.3%), roughly equivalent to that of France, and the country’s forecast of $7,700 GDP per capita for 1995 is well ahead of those of Slovakia, Hungary and Poland.
“The problem with the Czech market is a lack of liquidity,” says Salomon Brothers’ Parker. (Czech turnover is only 15.5% of market capitalization, while it is roughly 32% in Poland.) “Privatization is critical to boosting the free flow of liquidity in the market, which is now limited to specialists. We need to see lots of two-way flows.”
Most foreign investors would agree. The Prague exchange’s $18.5 billion capitalization is impressive for the region but it is less liquid than the Warsaw exchange, which is only a quarter of its size. “The Czech stock exchange is the real sleeper,” says Alan Hirst, head of Citibank’s central and eastern European division. “It’s going to bust loose at some point. The barriers to trading will eventually get chipped away.”
Slovakia has made significant strides in developing a market economy since the amicable break-up of Czechoslovakia three years ago. Sadly, these achievements have been marred by political heavy-handedness reminiscent of the worst excesses of the region’s totalitarian past.
The newest of central Europe’s post-communist nations has the region’s third highest GDP per capita (some $6,290), economic growth is steaming ahead at 5%, the private sector accounts for around 60% of GDP and inflation has declined from 11.7% at the end of 1994 to 10% now. Along with Prague, the Bratislava Stock Exchange has achieved central Europe’s highest ratio of market capitalization to GDP (18.5%), on a par with Germany, Greece and Portugal.
A promising story, but prime minister Vladimir Meciar has been branded the region’s chief demogogue and his hardline policies have prompted a sharp rebuke from the EU and the US. Meciar has clamped down on the press, the government has taken over public broadcasting and has also assumed control of privatization and the banks.
“It looks like a very internal thing related chiefly to personalities, and the government is unlikely to reverse the progress achieved on the economy,” says a US banker. “Market-oriented policies are there to stay. But it could have a chilling effect on direct foreign investment.”
Slovakia participated in the first wave of mass privatization in 1992 as part of Czechoslovakia. In the Slovak Republic this involved 750 enterprises. The second wave began in late 1994, but was cancelled by Meciar. A new model of voucher privatization was introduced under which investors will have their voucher books exchanged for National Privatization Fund (NPF) bonds. If the National Bank of Slovakia’s discount rate remains at its present 11%, the annual yield should reach $37 per bond. The NPF’s 1995 revenue is estimated at $500 million, which comfortably covers the $133 million it will have to pay on the bonds’ coupons.
Slovenia lags its neighbours in privatization, with the private sector accounting for about 40% of GDP, well below the regional average. It is not a problem of fundamentals: GDP is growing at about 6% per year and the country ranks second behind the Czech Republic in price and currency stability, legal safeguards and infrastructure. Shared borders with Italy and Austria have always exposed this tiny nation of two million people to western influence. But it has the region’s highest wage levels, a factor that has kept foreign investment away. Investors have also been reluctant to enter given the shadow of war in the Balkans.
“This is essentially a consensus society so there have been long delays in the privatization programme,” says Gahler. “We will see more companies coming to the market this year.” The Ljubljana Stock Exchange has been operating since 1989 but only 34 securities are listed. An over-the-counter market opened last year with eight companies acting as brokers.
While some central European countries struggle to build volume and liquidity in their national stock markets, Bulgaria is in the unique position of facing an over-supply of exchanges. Its 12 competing exchanges probably will be amalgamated into one of the two Sofia-based markets, the Sofia Stock Exchange and the First Bulgarian Stock Exchange. Then a means will have to be found to bring together these two larger exchanges.
“Proposals have been put forth to accomplish this,” says Deutsche Morgan Grenfell’s Kirk Alexander, an emerging market analyst. “In any event, mass privatization is likely to go ahead this year. Foreigners will be able to buy shares in local funds, similar to the Czech system.”
Alexander says that, if the funds are perceived to be competent, foreign investors will come into the market. “This is a selected-opportunities market, but they’ve got to get up to speed in areas such as custody arrangements and settlement.”
The long delay in implementing privatization has held the private sector’s share of GDP to below 50%. There has also been significant resistance from ministry officials and line management. By mid-1995 only 63 large-scale enterprises had been privatized by the Privatization Agency, which is responsible for 1,200 enterprises whose fixed assets exceed $1 million.
The parallel cash privatization programme has fallen consistently below target due to a lack of experience and top-heavy bureaucracy. The government has discouraged equity swaps and investors are unhappy with legislation which restricts repatriation of capital for four years.
“The state of the banking system is the biggest concern,” says Brown of Paribas. “An already weak state banking system has further deteriorated over the past six months. The authorities have postponed a durable solution to the underlying problems facing state-owned banks which are now increasingly affecting the private banking sector. The remedy lies in surgery, not patchwork.”
| Economic indicators show improvement | ||||||
| Country | GDP | GNP | Unemployment | Inflation | Current account | |
| (% change) | per capita | (% of workforce) | (%) | ($ bn) | ||
| 1995, 1996 forecast* | ($) 1993 | 1994 | 1995 forecast* | 1995 forecast | ||
| Bulgaria | 2.5, 3.0 | 4,100 | 12.8 | 52.5 | 0.1 | |
| Czech Republic | 4.0, 4.7 | 7,550 | 3.2 | 9.9 | -1.0 | |
| Hungary | 3.0, 2.5 | 6,050 | 10.4 | 29.3 | -3.0 | |
| Poland | 6.0, 5.0 | 5,000 | 16.0 | 23.6 | -1.1 | |
| Romania | 4.0, 3.7 | 2,800 | 10.9 | 30.0 | -1.5 | |
| Slovakia | 5.0, 4.2 | 6,290 | 14.8 | 10.0 | 0.2 | |
| Slovenia | 6.0, 5.3 | 10,585 | 14.6 | 10.3 | 0.4 | |
| * average of forecasts from EBRD, OECD, IMF, EU, JP Morgan, Economist Intelligence Unit, Vienna Institute, Project Link, PlanEcon and CS First Boston | ||||||
| Source: EBRD Transition Report 1995 | ||||||
| Central European international equity issues 1995 | ||||||
| Issuers | Amount | Issues | Sector | Country | Bookrunners | |
| ($ m) | ||||||
| MOL Magyar Olaj-es Gazipari | 149.9 | 1 | Oil/coal/gas | Hungary | Kleinwort Benson, Merrill Lynch, Lazard Freres et Cie | |
| Slovnaft | 112.7* | 1 | Oil/coal/gas | Slovakia | PaineWebber International (UK) | |
| OTP Bank – National Savings and Commercial Bank | 53.2 | 1 | Banking | Hungary | Schroders | |
| Chemical Works of Gedeon Richter | 36.0 | 1 | Chemicals | Hungary | Schroders | |
| Komercni banka | 32.0 | 1 | Banking | Czech Republic | CS First Boston | |
| Bank BPH – Bank Przemyslowo-Handlowy | 13.7 | 1 | Banking | Poland | Daiwa Europe | |
| BFK Bydgoska Fabryka Kabli | 5.4* | 1 | Telecoms | Poland | Creditanstalt-Bankverein | |
| Hajdutej Dairy | 4.3 | 1 | Food/drink | Hungary | Bank Austria-GiroCredit Investment | |
| Source: Euromoney Bondware, as of December 1 1995 * includes domestic tranche | ||||||
Private sector share of GDP
%
Source: EBRD, 1995 forecast
Romania finally gets motivated
Foreign bankers complain that, apart from corruption, business in Romania is hampered by bureaucrats whose jobs are vested in the status quo.
“There always seems to be a plethora of reasons for deferring privatization,” complains one European banker.
Romania’s first privatization law was passed in August 1991. It set up the means by which about 6,000 recently corporatized “commercial companies” (the Romanian equivalent of a joint-stock company) would be privatized. A single State Ownership Fund was created and allocated 70% of the shares of the commercial companies, while the remaining 30% were allocated to five regional Private Ownership Funds. Simultaneously, Romanian citizens were issued a booklet of five coupons representing one share in each of the Private Ownership Funds. The coupons could then be exchanged for shares in commercial companies. By June 1995 about 1,200 companies, roughly 20% of target, had undergone some sort of privatization, essentially through MEBOs (management and employee buy-outs).
But this pace was too slow.
“There is now considerable pressure from multilateral agencies to ensure that more is done, so things are now beginning to move in a more significant way,” says Ian Beith, managing director of Charterhouse Bank, which has provided emergency assistance to the National Privatization Agency under an EU Phare (aid) programme.
A law to accelerate privatization was enacted in June 1995 and new coupons were distributed to those who had not entirely used their initial coupons. These can be exchanged for shares in 3,900 small, medium and large firms until the end of March. Between 30% and 60% of the shares can be exchanged against coupons. Remaining shares are to be sold by the State Ownership Fund for cash.
A total of 554 companies have been earmarked for cash sale to strategic investors, domestic or foreign. A target date for the sale of these companies has not been set, but the World Bank has fixed quantitative targets for 1996 as criteria for granting a financial and enterprise sector adjustment loan (FESAL).
The slow pace of privatization has held back growth of the Bucharest Stock Exchange. Yet Beith says that by this time next year he expects to see a “marked difference” in the level of activity. “The privatization process will give it a boost and you’ll see strategic offshore investors moving in.”
Investors are looking particularly at export-oriented industries, retail, distribution, and food and beverage companies. The big plus is that, for most businesses, the level of international competition is much lower than in the Czech Republic, Hungary and Poland.
A number of strategic investors are already in the market, including Citibank (which plans to upgrade its office in Bucharest to a fully-licensed bank). Shell has announced $150 million plans to build a petrol station network and Daewoo has spent $156 million to acquire the Oltcit car factory. Colgate-Palmolive, Procter & Gamble and Unilever are among large foreign companies in Romania.
Sporadic and opportunistic
With a few significant exceptions, central European countries have not been tempted to borrow abroad, preferring to rely on direct foreign investment. Newly privatized corporates are not ready to supplement equity financing with long-term debt funding either. Rupert Gordon-Walker explains
Each new central European Eurobond is greeted with great enthusiasm, but then turns out to be an anticlimax. Fat national foreign exchange reserves, a demand for equity financing from nascent privatized industries, and cheaper alternative sources of debt funding are keeping sought-after sovereign and corporate credits away from international bond markets. The past few years have been distinguished by benchmark issues that were more flag-waving than evidence of substantial issuance.
Ex-commmunist nations have approached Moody’s and Standard and Poor’s rating agencies to gain entry into the international investor community. Their reception has been mixed. At the end of 1994, Cez AS, the Czech Republic’s main power utility and the largest quoted company in central Europe, acquired a BBB- rating from Standard and Poor’s – the only corporate in the region to gain investment-grade status.
After intensive marketing by JP Morgan, Cez brought a $150 million five-year deal to the market via its Netherlands-based funding arm, at 110 basis points (bp) over US treasuries: its
scarcity value justified the tight pricing in comparison to similarly rated credits.
The Cez issue was meant to encourage further corporate issuance. Czech phone company SPT Telecom was expected to be next, followed by Polish companies wanting to raise financing for infrastructure projects. But few deals materialized, although Hungarian banks have been regular issuers – mainly in yen.
Poland’s $250 million five-year deal in June was the highlight last year. It surprised the market only by the tightness of its spread – 185bp over five-year treasuries – which prompted an immediate 4bp rise in Poland’s PDI (past due interest) Brady bonds. A month earlier, the spread was expected to be as high as 220bp. The varied credit ratings – Baa3 to BB – astonished some analysts but reflected the still immature state of the market at the time and the uncertainty of country risk appraisal.
The investment-grade rating from Moody’s so soon after Poland had completed a Brady restructuring, although unusual, gave the deal the momentum essential for a successful placement. Of course, it also widened the potential investor base beyond just emerging market funds, while offering an alternative to Latin American debt. In particular, it gave US fund managers an opportunity to buy yield – made available by a Rule 144A tranche – at a time when the primary market was swamped with triple-A paper.
However, there is no momentum for consistent central European Eurobond issuance (except from Hungary). Rather than setting benchmarks for a new sector, prestige issues merely justify boasting by rival regional finance ministries. Paradoxically, they look good because they are so rarely seen.
The reason for their absence is that there is a more appealing market elsewhere. Last year, central European borrowers could raise far cheaper funds in the syndicated loan market, and aggressive terms should still be available this year. Even issuing yen bonds was expensive. At the end of November, the City of Bratislava issued a five-year Euroyen bond at yen Libor plus 2.05bp, the equivalent of dollar Libor plus 2.45bp. Conversely, the Slovak Waterworks tapped the syndicated loan market for five years at just dollar Libor plus 1.15bp a week later.
Poland, the Czech Republic and Hungary are the core central European markets. Dirk Damrau, director of emerging markets research at Salomon Brothers in London, believes that in five years time they will be comparable to Spain and Portugal. Convergence on the Deutschmark bloc will continue, implying real currency appreciation, higher credit perception, lower yields and, hence, a wider investor base. Integration into the mainstream is likely to be slower for the rest of central Europe.
However, like Russia, central Europe needs to balance its aversion to foreign capital inflows and at least, argue the western banks, curb nationalist pride that is concerned about surrendering any control or profits to western banks.
Central banks and finance ministries are also wary of the markets expanding too quickly and of speculative capital flattering their economies, only to abandon them when the going gets tough. This partly explains illiquidity and the dearth of yield curve instruments. But the massive inflow of direct investment – particularly into Poland and the Czech Republic – eliminates the need for bond market depth, at least for now. At the end of last year, official reserves in Poland reached $13 billion, and in the Czech Republic nearly $12 billion, so a Mexico-style collapse is unlikely. Also, recently-privatized corporates need time before supplementing equity financing with long-term debt funding.
Poland will rarely be seen this year
Poland capped overseas bond market borrowing last year at $300 million. After the success of the country’s Eurobond issue, finance minister Grzegorz Kolodko indicated that a further $500 million might be raised this year, including a Euroyen deal. But Hanna Gronkiewicz-Waltz, head of the national bank, warned the government against financing its budget deficit abroad. Wary of speculative capital, and keen to preserve the goodwill of the rating agencies and the positive investor perception gained from its June issue, Poland will be a rare visitor to the markets this year.
The zloty T-bill market is easily accessed. Although barred from the repo market, foreigners can buy any other debt security and repatriate profits tax-free (but only through the legal entity that made the investment). Two-day settlement is facilitated by well-established custodians and currency transactions are performed by licensed domestic banks. Initial maturities of eight, 13 (benchmark), 26, 39 and 52 weeks offer yields close to 25%. Unfortunately, liquidity is poor. The bid/offer spread for benchmarks is 100bp, double the spread for equivalent instruments in Mexico or the Philippines, and average daily turnover in the secondary market is a mere $5 million compared with $150 million in Mexico and $25 million in the Philippines. A shortage of alternative instruments keeps most of the bills locked up with the Polish banks which form nearly 100% of the domestic investor group.
Meanwhile, there is a danger that foreign access will be temporarily restricted. Finance minister Kolodko is worried that excessive capital inflows will fuel inflation, a concern used by the national bank to justify high interest rates. Kolodko wants lower rates, and in order to prevent what he views as speculative buying of zloty strength, new foreign investment in T-bills or participation in auctions may be limited.
An alternative for investors is the fledgling commercial paper (CP) “kwit” market. PepsiCo’s inaugural z55 billion 30-day deal in September 1994 – part of a z550 billion ($24 million) two-year
programme – was a sell out. Financing costs for PepsiCo’s local subsidiary were 300bp cheaper than the company’s usual bank borrowing, and investors were grateful for the exotic instrument. Other multinationals – Fiat, Unilever and Aga Gaz – have signed up to similar programmes, and a year ago, Polish brewer Elbrewery, placed 364-day paper – the longest dated so far. With legislation now permitting Polish corporates to issue long-dated maturities, a less artificial yield curve may develop.
However, CP has promised more than it has delivered. The five successful programmes, with $150 million outstanding, make up just 1% of the treasury market. Foreign firms can raise cheaper funds offshore, and the prospect of further real zloty appreciation provides them with little incentive for long-term local borrowing.
The Czech Republic’s evolution continues
The Czech government has run a budget surplus since 1993, and in 1995 it was just under 2% of GDP. This year a balanced budget is expected, so the outlook for fixed-income supply remains bleak. Inflation fears have prompted the national bank to issue liquidity bills (to mop up excess liquidity in the domestic banking system), which exclude foreign investors. For the same reason, foreigners are also restricted to buying T-bills with an initial maturity of more than one year. Qualifying ministry of finance (MoF) T-bills are scarce and, due to their tax-exempt status, low yielding. National Property Fund bills – quasi-sovereign debt issued by the privatization agency – can be bought at primary auction but are barely traded. Czech commercial banks are beginning to issue CP, and it is occasionally possible to buy bank bonds.
An advanced privatization programme has resulted in a more developed corporate bond market than in Poland, with supply largely driven by foreign demand for koruna exposure. A 25% withholding tax deters domestic buyers, but foreigners can reclaim the tax under double-taxation agreements. Nevertheless, the tax penalty means that corporates trade at a yield premium of up to 200bp over Czech treasuries, hampering issuance. Other corporates which have tapped the market include SPT Telecom, Skofin and Komercni Banka (currently the longest dated issuer with an 11.4% bond maturing in September 2001). Recently CHB, the mortgage banking subsidiary of Investicni Banka, announced plans to launch a five-year bond with a 9.75% coupon.
Hungary is the reluctant maverick
Hungary has failed to gain investment-grade ratings from western agencies – yet its central bank has borrowed from abroad for the past 30 years. More than 80% of its roughly $30 billion gross debt is payable overseas, mostly outside the ex-Comecon bloc.
However, Japan Credit Ratings, impressed by the country’s 100% repayments record, gives it an A. Hungary’s recent capital market activities have been yen based, but most markets and currencies are open at a price. Outstanding Hungarian Eurobond issuance of $13.6 billion is almost twice that of the next largest central European issuer, the Czech Republic.
The local T-bill market is active, but the MoF, worried about speculative flows, only allows foreigners to buy issues with an initial maturity of one year. The State Securities and Stock Exchange Supervision Board is investigating the recent 1997 bill offering because of unusually large (Ft60 billion) [$441 million] subscriptions. Purchases are tax-free for foreigners, but further along the curve, are tightly restricted to a limited number of illiquid bonds.
Hungary has $3 billion to $4 billion of refinancing to complete this year. It has attracted 60% of the region’s direct foreign investment in the last five years, but will need to sustain 1995’S austerity measures to attract an investment-grade rating outside Japan.
Slovakia: stability on offer
Continued tension between president Kovac and mercurial prime minister Meciar has meant low foreign involvement in the bond markets. But the bond markets’ relative stability compared with a stock market disturbed by privatization uncertainty, has encouraged domestic interest and issuing activity.
Last year, the MoF raised SKr24.2 billion ($815 million) through the sale of seven issues, mainly to fund the previous two years’ budget deficits. Falling inflation has allowed fixed-coupon issuance, rather than floating-rate bonds linked to the central bank’s discount rate. An auction of three-year 9% bonds was 1.3 times oversubscribed for an average yield of 10.18%. A month later, the MoF raised SKr4 billion from another issue of three-year bonds at an average yield of only 9.6%. Domestic demand for government debt is strong and is encouraged by its tax-free status.
On September 28 1995, the Bratislava Stock Exchange started trading two bonds with two-year maturities and one with a five-year term, totalling SKr12.17 billion and issued through local banks. In the corporate sector, the state-owned electricity company, Slovenske Elektrarne plans a SKr1.5 billion five-year issue at an expected yield of 13%, making it the country’s largest corporate bond offering. Whether others will follow is uncertain.
Slovenia’s solid image
In December, Slovenia mandated JP Morgan to lead-manage the country’s first Eurobond deal. It will be launched this year with a maturity of five years and should raise between $150 million and $200 million. A Rule 144A option will make it available to US investors. Morgan will also help obtain long-term credit ratings, which should be higher than Slovenia’s central European peers. A low debt burden relative to export earnings, and a manageable 18% apportionment of the former Yugoslavia’s $4.5 million debt (supported by $4 billion of reserves) means the country is well-perceived in the syndicated loan market. Only the Czech Republic can raise loans cheaper than the Libor plus 1% achieved by Slovenia from a $60 million deal last September.
Bulgaria remains thin
Last year, Bulgaria’s Brady bonds produced a return of 25% against JP Morgan’s EMBI+ (Emerging Markets Bond Index) index of 13%, and raised hopes that Bulgaria could repeat Poland’s achievement in mainstream debt markets – albeit by offering investors a more attractive yield. But a trade surplus, growing foreign reserves and internationally-guided structural reforms need to be balanced against a weak banking system, fiscal instability, high indebtedness and an undeveloped and illiquid domestic market. Despite a spurt of activity in 1994, T-bill secondary market trading is thin.
Romania looks outside
National bank governor Mugur Isarescu hopes to raise up to $1 billion in medium- and long-term loans by May (until November 1995 borrowing was short term only). Last year, two syndicated loans – the most recent a $110 million 18-month facility at Libor plus 2.25% arranged by Citibank – ended a 15-year absence from world capital markets. Isarescu believes Romania now has sufficient credibility with the international investor community to issue its first Eurobond.
However, balance of payments problems and stalled IMF and World Bank negotiations have caused delay in seeking the sovereign debt rating. Isarescu’s bravura turned to embarrassment last year when the lei depreciated 30% against the dollar, following a 40% rise in imports and a forecast current account deficit of $1.5 billion. Since 1989 Romania has attracted only one-sixth of the direct foreign investment obtained by Hungary, and has initiated economic reforms late – launching a privatization scheme only last summer. As yet, Romanian Eurobond issuance looks premature.
| Sovereign bond ratings | ||||
| Country | Moody’s | Standard & Poor’s | ||
| Bulgaria | – | – | ||
| Czech Republic | Baa1 | A- (stable) | ||
| Hungary | Ba1 | BB+ (negative outlook) | ||
| Poland | Baa3 | BB (positive outlook) | ||
| Romania | Agencies told to delay ratings | |||
| Slovakia | Baa3 | BB+ (stable) | ||
| Slovenia | Agencies asked to give ratings this year | |||
