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Hungary special report 2015: Market with a mission

Growing Hungarian companies are increasingly looking for equity funding. The 150-year-old Budapest Stock Exchange is ready to help.

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Last year was a momentous one for the Budapest Stock Exchange (BSE), 150 years after Hungary’s first stock exchange was formed in 1864. Ensuing events diminished the BSE’s relative importance, while the post-Soviet era hasn’t always been kind to the financial reputation of a country long viewed as being at the heart of Europe. But today the city and its stock exchange are on the move again.

The BSE, a leading member of Vienna-headquartered CEESEG, the largest equity trading platform in Central and Eastern Europe (CEE), has just enjoyed yet another solid year. The Xetra trading system has helped provide a stable framework for capital market transactions, including the introduction of iceberg-type orders.

After several years of slow or no new capital markets activity, the BSE welcomed a range of new companies into its fold, in the form of initial public offerings (IPOs) from the likes of healthfood specialist Norbi Update Lowcarb. According to financial information provider Dealogic, convertible bonds worth $637 million were issued in 2014, against none in each of 2013 and 2012, with total equity capital market transaction volumes jumping from just $13 million in 2012 to $665 million in 2014.

The BSE also retains a powerful role in the local equities market. Fully 64% of domestic equity transactions were carried out on the main bourse in 2014. Nor is this a peripheral trading platform. The BSE remains the second most heavily traded equities platform within CEESEG after Vienna: 1.2 million transactions were completed in 2014, with an average trading volume of HUF1.6 million ($6,000).

Zsolt Katona

Zsolt Katona, Budapest Stock Exchange

The majority of trading on the BSE focuses, as ever, on a handful of securities, led by energy giant MOL Group, financial services major OTP Bank and rising biotechology and pharmaceuticals star Gedeon Richter. But local and foreign investors are also free to choose between 49 listed equities, 130 bonds and 28 mortgage bonds. In 2014, turnover on the BSE’s derivatives market reached HUF2.45 trillion.

The next few years will be vital for the bourse’s long-term development. Zsolt Katona, the bourse’s chief executive officer, hopes to continue to build out a “strong local stock exchange concentrating on the needs of domestic investors and corporates using a state-of-the-art trading structure”. The BSE is also set to remain a constant and powerful fixture within the confines of CESSEG, Katona adds, noting that the burgeoning alliance offers international institutional investors easy access to both Hungarian and regional securities.

Bringing in the listings

But the greater – and far more exciting - challenge for executives will be its allure as a potential listing candidate for a new generation of Hungarian corporates. As the broader economy continues to rebound from a crippling recession stemming from the financial crisis, it is beginning to generate an army of fast-growing corporates ranging from software to new energy to biotechnology, with offices across the world.

As these companies eye future listings, the BSE will hope to be central to those discussions. Katona points to “a number of privately held Hungarian firms that are ready for a stock exchange listing. We do have some in the pipeline considering entering the market, some with a market cap of a couple of hundred million euros, and a handful with a potential market cap of more than a billion euros.”

The aim, as Katona is quick to admit, will be to make the BSE as attractive as possible to the country’s rising corporates. Some firms are likely to seek local stock flotations; others, such as Wizz Air, which scrapped then revived its plans for a $200 million IPO in 2014, appear set to pursue dual listings. In the case of the budget airline, with routes across the CEE region, the most likely avenue is a dual stock flotation in Budapest and London. A host of other future listing candidates, likely to include rising firms such as presentation software specialist Prezi, may focus on listing a slice of their securities in New York.

Then there are the state-owned firms set to list shares in the years ahead. This list is likely to include utilities, telecommunications firms and more than a few financial services firms. Having absorbed two lenders – MKB and Budapest Bank – into the state in 2014, government officials are mulling whether to sell them to private sector investors or to merge them and pursue an equity flotation.

“We are optimistic, following recent talks with government officials, that these lenders will be listed on the BSE,” says Katona. “The question,” he adds, “is how attractive the BSE can be, and whether and how we can compete for these companies’ listings with other trading venues. I’m convinced that with our technology, pan-regional scale and the strength of our economy and investor base, we should be able to clinch many if not most of those listings.”

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