As an early adopter of a second-pillar private pension system in 1999, and with vibrant mutual fund and life insurance industries, Poland has developed deep local debt capital markets (DCM). At the height of the 2010 eurozone sovereign debt crisis, this made the government's financing much less vulnerable to external shocks.
"If you look at the yields on Polish sovereign paper, there is no correlation with, for example, Greek government or Irish banking debt, because relative to the rest of the EU, Poland has a good macroeconomic situation and healthy banking sector," says Krzysztof Stupnicki, chief investment officer for the Polish life insurance and fund management operations of Metlife Amplico.
To date, however, the zloty bond market has not been significant for corporate issuers. While sovereign debt accounts for about 53% of gross domestic product (GDP), corporate bond issuance is just 5% of GDP, mostly from banks and a handful of blue-chip companies. The strength and liquidity of the banking sector goes a long way to explain the underdevelopment of a corporate bond market.
"When we spoke to companies interested in bond issuance, they would usually have bank financing in place, but would like to consider different sources of funding to make it cheaper or less collateralised or more flexible," says Maciej Tarnawski, head of zloty DCM at Bank Pekao.
Stepping up transparency
The infrastructure of the bond market itself also presented a problem – until 2009, when the Warsaw Stock Exchange (WSE) began to take an interest. Previously, the only public market for Polish zloty bonds was Treasury BondSpot, which facilitated institutional trading of government bonds.
"There was no single clearing system, all bond transactions were private, so a register of bonds would be maintained only by the arranging bank, and investors could only buy or sell bonds through that bank," says Mr Tarnawski.
In 2009, the WSE purchased more than 90% of the shares in BondSpot from previous Italian owner MTS, with Polish banks and brokerage houses owning the remaining stock. The WSE then launched a new initiative in September 2009, called Catalyst, which is creating a central trading platform for non-government bonds.
"Municipal and corporate bonds had been mainly represented by banks who covered this market, and we discovered there was a lack of transparent information about the current prices of these instruments," says Robert Kwiatkowski, the head of WSE business network development.
Easy listing
For the interbank market and institutional investors such as pension funds, corporate and municipal bonds are now listed on BondSpot. And retail investors can also access the paper via brokerage firms active on the main WSE.
Companies already listed on the WSE equity market need only provide details of their planned issuance programme to list on Catalyst, rather than producing an entire prospectus, which keeps costs and time-to-market to a minimum. In addition to creating a more liquid market, Mr Kwiatkowski says smaller municipalities and high-yield corporate issuers see Catalyst as a chance to raise their profile and appeal to a broader investor base, including the growing number of international broker-dealers that have joined the WSE.
Breakthrough issues
Institutional investors appear to have given Catalyst a warm reception. Market participants hope it will lead to greater standardisation of deal documents, which had previously varied depending on the lead manager of a given deal.
"Catalyst is an initiative that should have been taken even earlier – it is good for the market. You can find companies in Poland that will pay you 7% to 8% for your money; the government will only pay you 4% or 5%," says Krzysztof Kozuchowski, head of fixed income at ING Fund Management in Warsaw.
In July 2010, blue-chip telecoms company Polkomtel listed the largest single-tranche zloty corporate bond to date, for 1bn zlotys ($345m), with Pekao/UniCredit and BNP Paribas as joint bookrunners. It also broke new ground by using standard English law Euro Medium-Term Note (EMTN) documentation, offering companies the possibility to prepare EMTN programmes and switch opportunistically between euro- or zloty-denominated issues.
Infrastructure programmes are also a deep source of potential issuance. Bank Pekao has worked on three programmes – a water and sewage project in Bydgoszcz, a tram-line in Lodz, and transport systems in Gdansk – which use a revenue bond format specific to Polish law. This allows a municipality-owned company to issue bonds that are secured on the future revenue flows from the infrastructure – such as transport tickets, utility bills, or service payments from the local government itself – without increasing the municipality's own debt ratio, which is limited by law.
Infrastructure bonds
Finally, state development Bank Gospodarstwa Krajowego (BGK) began a programme of infrastructure bonds in 2009 to fund key national projects, guaranteed by the Polish government. Investors were pleasantly surprised when the first deal offered a spread of 40 basis points to the sovereign, but they also believe the government was rather less pleased with the outcome.
"This premium was necessary because this was a new issue, a new way of financing, getting the market acquainted with the bond programme. But we should tighten the spread much closer to the government, as there is no reason other than liquidity why these bonds are more expensive," says BGK president Tomasz Mironczuk.
