At about the same time, the tide of investment also turned as Portuguese companies began investing more abroad than foreign companies invested in Portugal. Both phenomena reflect the country’s growing prosperity and an opening out to the wider world, accelerated by EU enlargement and globalisation.
For Miguel Athayde Marques, chairman and chief executive of Euronext Lisbon, the growing internationalisation of Portuguese companies is also an encouraging development for Portugal’s capital markets. “Portuguese companies have traditionally been
passive exporters,” he says. “At the beginning of the 1990s only a handful of groups were investing abroad. Now there are hundreds of Portuguese companies with an international presence, several of them world leaders in their sector. Internationalisation is very demanding in terms of capital and we expect an increasing number of companies to turn to the stock market to fund expansion.”
Reduced debt
To date, the Portuguese corporate sector, dominated by small and medium-sized companies that are often family-owned, has overwhelmingly relied on bank loans or EU funds administered by the state to fund investment. This has resulted in average gearing ratios that are among the highest in Europe, a potential brake on development that should attract more companies to the equity market.
“Companies are being restrained by limits on the level of indebtedness they can sustain on a fixed capital base. To ensure continuing growth and internationalisation, they will need to raise capital through initial public offerings and capital increases,” says Mr Athayde Marques.
A former banker, he took over at Euronext Lisbon in January after his predecessor, João Freixa, left to become vice-president of Caixa Geral de Depósitos. Mr Athayde Marques had previously been a CGD board member since 2000.
Euronext move
The decision by the Portuguese stock market to merge with Euronext, the pan-European bourse that also includes the French, Dutch and Belgian markets, was aimed at averting the isolation of a small peripheral market amid the trend towards European consolidation. Integration with the Euronext platform was completed in November 2003 with the goal of increasing liquidity by providing greater visibility for Portuguese stocks, lowering transaction costs and improving security.
In addition to offering Portuguese companies a bigger, international shop window, Euronext has increased the range of products directly available to investors in Portugal. Last year, stop-loss and autonomous structured warrants were introduced in what is becoming one of the fastest growing areas of the market, and a new non-regulated market for structured securities was launched where 48 products are now traded.
The number of official market members has almost doubled from 24 Portuguese and two foreign members before integration, to 17 Portuguese and 29 foreign members today. A new flat fee per trade has replaced the previous system based on the amount of the transaction, cutting the fee per trade to €1.3, from what would have been an average of €2.95 in the first 10 months of 2004.
In the merging of the 10 existing regulated Euronext markets (two in Portugal) into the single Eurolist by Euronext market in April, Portugal’s second market for smaller companies was integrated into the main cash market. This single list is now divided into three categories: blue-chips with market capitalisations of more than €1bn, mid caps between €150m and €1bn and small caps up to €150m.
Eurolist by Euronext Lisbon, the new designation of the Portuguese market, currently lists 55 shares, 178 bonds and 166 warrants among a total of 409 securities. The PSI 20 share index represents the top 20 companies with Millennium BCP having overtaken Portugal Telecom as the group with the biggest market capitalisation.
Mr Athayde Marques says the creation of a single Euronext list will further enhance the corporate visibility of Portuguese companies, which are now all quoted on the same international market, regardless of size. The new concept of Small and Mid-Cap Experts will also ensure a sharper focus by investment banks on Portugal’s smaller companies, he says.
The investment banking arms of Banco BPI, Caixa Geral de Depósitos, Banco Espírito Santo, Millennium BCP and Santander Totta have already entered into these SME agreements that involve a commitment to produce research on at least seven smaller companies, to analyse their annual results and organise promotional initiatives.
Pension injection
Bankers believe that a bigger involvement of pension funds would help the Lisbon equity market gain greater critical mass. Portuguese funds operate under strict rules, limiting investment in certain areas. Special authorisation is required to allocate more than 55% of a portfolio to equity and other limits apply to investment in foreign assets and other categories.
But it is the risk-averse investment strategy of Portuguese fund managers, who have been keeping equity allocations far below the maximum levels permitted, that is seen as the biggest barrier to overcome.
Like other European countries, Portugal faces an impending crisis in its state pension system. Contributions do not cover future liabilities and a number of official and independent studies have indicated that, without reform, the current pension system would start collapsing between 2010 and 2020. Something will have to be done.
However, the election of the new Socialist government has raised uncertainties over plans by the previous administration for an important reform of the state social security system. This would enable people aged up to 35 to opt between state and private pension schemes for the portion of their salary above a fixed ceiling. But the Socialists have expressed a degree of aversion to the “privatisation” of pensions and the shape of future reform remains unclear.
Privatisation in the classic sense has been an important source of state revenue in the past. But, in the view of CGD’s João Freixa, the big sell-offs of the past, once hailed as wave of “popular capitalism”, have dampened the appetite of Portugal’s small savers to invest in shares. He says: “Interest in equities was largely driven by the privatisation process, which created expectations of gains which haven’t materialised and has, in many cases, left the state still effectively in control of the companies sold. Over the next few years, Portugal will have to pay the cost of suspicious customers, reluctant to return to the share market because they were hurt by the privatisation programme.”
Few privatisations are in the pipeline today, but the pressures on public finances remain strong. Under the previous centre-right government, Portugal – the first country to face disciplinary measures from the European Commission for breaching the EU’s growth and stability pact – succeeded in bringing the budget deficit back in line by means of tough austerity measures and a series of extraordinary measures.
Analyse this
But the real deficit – stripping out “cosmetic” accounting measures – is still estimated to be in excess of 5% of GDP, well above the EU limit of 3%. Prime Minister José Sócrates has asked Vítor Constâncio, governor of the central bank, to carry out an audit that will provide the new government with a precise analysis of the state of public accounts. But it is already clear that state spending will have to be strictly disciplined and new efforts made to increase revenue.
Mr Sócrates has ruled out tax increases and pledged to bring the deficit below 3% of GDP without recourse to extraordinary measures within four years. It will not be an easy challenge; the recent relaxing of the stability pact rules will help. Mr Sócrates will be pushing hard to ensure that his ambitious technology plan and other “healthy” public investments will be excluded from deficit calculations.
He is also banking on an economic recovery and a crackdown on tax and social security fraud and evasion to increase revenue. But bankers believe there is still plenty of room for further government securitisation operations, in line with last year’s pioneering operation, involving non-performing tax and social security claims.
In this deal, the first in the EU to involve tax debts, the state transferred credits arising from tax enforcement measures from 1993 to 2003 to a Portuguese securitisation vehicle controlled by Citigroup. The debts had a nominal value €11.44bn and a price of €1.99bn.
The vehicle issued bonds, which were asset-backed by the acquired tax and social security credits, for a private placement with an institutional investor. In a second phase, the vehicle refinanced the operation by issuing new bonds, collateralised by the same credits and listed on Euronext Lisbon and in Luxembourg, and repaid the institutional investor.
The need to enact new legislation for this deal provided an opportunity for the government to improve the existing law on securitisation. Following these amendments, the legal framework now applies not only to receivables but also to other types of assets available. Non-performing receivables have become a legitimate asset and securitisation vehicles are no longer obliged to keep a record for withholding tax purposes when their securities were held by investors.
Late last year, the government abandoned an attempt to securitise extensive state-owned real estate assets after the European Commission ruled that deal would not qualify for reducing the budget deficit. As a last-minute alternative, the government opted instead for a controversial €1bn transfer from the pension fund of state-owned CGD to the general fund for public employees. It had earlier made similar transfers from three other state-owned companies. Bankers now expect the new government and other state entities to embark on further securitisation operations.
They also believe planned legislation, permitting the issue of covered bonds by Portuguese banks, will provide a useful alternative to residential mortgage securitisations. Several of the leading banks have already indicated their interest. “Whether covered bonds will have an immediate impact on the popularity of residential mortgage securitisation will depend on the speed with which the necessary legislation to provide for covered bond issuance is finalised,” says one analyst.
Back for more
In 2004, several banks returned to the securitisation market as repeat issuers. Banco Espiríto Santo (Lusitano Mortgages 2), Millennium BCP (Magellan Mortgages 2), Santander Totta (HippoTotta 2) and Caixa Económico Montepio Geral (Pelican Mortgages 2) all launched second residential mortgage securitisation operations. HippoTotta 2 ranked as the largest to date, with €3bn of residential mortgages being securitised. In late 2003, CGD closed two large transactions securitising residential mortgages (Nostrum Mortgages 2003-1) and consumer loans (Nostrum Consumer Finance).
