When UniCredit merged with Germany's HypoVereinsbank (HVB) in 2005, it acquired the services of Pawel Tamborski, now a veteran of 16 years at the bank via Creditanstalt, which HVB acquired in 2000. At Creditanstalt, he had worked on capital markets operations in his native Poland, including some of the earliest post-Soviet initial public offerings (IPOs). Mr Tamborski, now UniCredit's co-head of central and eastern Europe (CEE) equity capital markets, has expanded to cover the whole region, but Poland remains firmly at the centre of his attention.
"It is only the top-size and most liquid companies that have equity issuance potential right now, although in the few markets that have developed an internal capital base, such as Poland and Turkey, and Romania to a limited extent, there could be top stories among the mid-cap companies that would find enough demand locally and among opportunistic international investors," says Mr Tamborski. "CEE is quiet not only because of the global problems, but also the regional ones such as currency volatility," he says. International asset management companies are not keen to consider new issues because their asset values have been cut by as much as 70% in foreign currency terms.
Companies need capital
Asset managers might not be receptive but companies need capital. Mr Tamborski believes that growing sophistication in some CEE markets - with Poland again leading the way - will allow for the adoption of Âtechniques from the established western European markets. "We have to be innovative here, less IPO, more PIPE [private investment in public equity] and pre-IPO structures," he says.
As the region's largest economy, Russia also has the heaviest corporate refinancing needs, and cash-strapped Russian companies could, in theory, be a target for merger and acquisition activity. "Only a limited number of transactions have happened so far, because there is still something of a gap between the expectations of sellers and the thinking of buyers on valuations," says Mr Tamborski.
Governments are also in need of funds, and some such as Ukraine, Belarus, Hungary and Serbia are directly under pressure from the International Monetary Fund to privatise some of their assets in a bid to shore up ailing public finances.
However, Mr Tamborski says there is an understandable reluctance to push ahead with public listings at a time of such depressed valuations. "Serbia has already suspended a few projects, Hungary published a new ownership programme for the power grid and generation sectors, but is cautious about launching the transaction because of the market conditions," he says.
Even when equity markets begin to recover, he is sceptical about a return to the practice of multi-listing on non-regional exchanges such as London or Frankfurt as well as in Warsaw or Prague. "Most of the time, it is prestige-driven, and most of the time it does not make sense, because you are splitting and draining liquidity. Those investors who can invest in the region don't need a listing in western Europe, so we don't think it generates extra demand," he says.
Emerging Europe corporate debt issuance
DCM Restoration
Equity capital market bankers will be waiting for increased stability in exchange rates together with better conditions for debt financing as indications that the time is right to tentatively enter the market again. Confidence in the restoration of debt capital markets (DCM) for the CEE region has been fostered by a 400 basis point (bps) tightening of credit default swap spreads on Russian sovereign debt, together with Gazprom's 10-year bond issue in April 2009 (although the significance of this issue is complicated by a three-year put option on the bond).
"There has been a surprisingly good development in the market in the past few weeks, especially compared with February 2009 when fears erupted over the effects of the financial crisis on emerging Europe," says Olaf Sarges, head of corporate DCM origination for UniCredit in Munich.
"The sovereigns are of course the prominent issuers in the region, and as soon as they have re-opened the market, the other issuers are queuing up - first the state development banks and export-import banks, then the well-known names, state-backed companies and regional multinationals," adds Clemens Popp, of DCM origination, UniCredit, on the sovereign side.
Higher quality sovereign issuers with a rarity value in the market - such as Slovenia, which issued in March 2009 - are the most likely to find appetite among buyers who are finally beginning to differentiate between each CEE country, rather than taking fright at the whole region. And Mr Popp adds that UniCredit is "bringing in the harvest" of its own presence on the ground, winning a mandate from front-runner Croatia for its first Eurobond in four years, alongside more familiar names in the sovereign debt universe such as Deutsche Bank and BNP Paribas.
"As soon as Croatia has re-established its presence in the international capital markets, then potential next candidates in the Balkans would be Serbia and Macedonia, so the banking community tests investor sentiment from one country to the next," says Mr Popp. For those countries with well-developed local pension systems, such as Poland, or well-capitalised domestic banks, such as Croatia, the domestic market also offers a reasonably deep pool of bond or loan funding.
But the sovereigns most in need, in many cases, have the least healthy domestic banks and are unlikely to find a market among international investors any time soon. "Hungary is currently intensively trying to re-establish its appearance in the market, but is fully aware that, as long as its credit default swaps trade in the three-year area at about 500bps to 600bps, the market is effectively closed to it," says Mr Popp.
Refinancing the region
Similarly, high-yielding corporate credits will be the last in the queue to access the capital markets as confidence returns, says Mr Sarges. "For some names in the BB and even B area, I am convinced we will see some issues in the CEE area, if they are non-cyclical companies. But for companies in the cyclical sectors or with lower ratings, it will be very difficult," he says.
In the first instance, some strategically important companies that cannot refinance commercially will turn instead to the government - Russia, Ukraine and Kazakhstan offer examples of this. "If they are otherwise destined to fail, strategic companies will be nationalised or, because of their importance, the local banks will agree a restructuring deal," says Mr Sarges. "But this will not be typical among high-yield issues, and it will take another 12 to 18 months before people begin to believe again that high-yield debts will be repaid on the strength of the business case, rather than government support," he adds.
For Ukraine, the government is increasingly short of resources, but the Kazakh and Russian authorities have more room to manoeuvre, according to UniCredit's head of CEE economic and fixed-income research, Martin Blum. "Russia effectively used up about $200bn in foreign exchange reserves in the fourth quarter of 2008 and first two months of 2009, but that significantly improved the external balance sheet of the private sector, so that private sector foreign debt fell by $90bn over that period and the need for state support decreased," he says.
By contrast, companies that financed themselves more extensively through the loans market may stand a better chance of negotiating restructuring deals with those banks that are already heavily exposed to their existing debt, says Mr Sarges, who works closely with UniCredit's own loan syndication unit. "The banks that were already involved will look for a solution offering them a higher yield or backing by assets in return for deferred repayments, but for at least six months I don't think these restructurings will yet involve new investors," he says.
And Mr Sarges says that a broad range of companies in the stronger economies such as Poland, the Czech Republic and Slovakia are even considering euro medium-term note programmes as eurozone membership expands. "Some issuers are contemplating an issue even before the summer break, and they are going for a credit rating they would not have accepted last year," he says. "So my feeling is that out of the eurozone members and candidates, this will be a market where we see a much higher number of issues than we might have expected a year ago, and not only from large utilities and telcos issuing in benchmark size, but also smaller companies issuing in €200m to €300m size."
As this issuance develops, he believes UniCredit is well positioned to win a growing share of the mandates. "Two or three years ago, issuers liked to deal with the big American investment banks even though those banks might not have had a big loan exposure. Now they understand the need to offer some cross-selling to their core loan banks who are able to deliver, and this represents a great opportunity to UniCredit," says Mr Sarges.
