Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

Issuers on the fringes of Europe's crisis

Although not directly affected by the squeeze facing eurozone peripheral sovereigns and banks, central and eastern Europe is affected by its economic ties with the EU and the prevalence of western European banks in its markets. Philip Alexander hears from a range of European issuers outside the eurozone, including sovereigns, agencies, banks and corporates, on how the crisis has affected them.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Issuers on the fringes of Europe's crisis
Issuers on the fringes of Europes crisis PANEL

The participants:

Bartosz Drabikowski, chief financial officer, PKO Bank Polski, Poland. Rated A- unsolicited (Standard & Poor’s)/A2 with stable outlook (Moody’s)

David Franta, director, treasury and fund-raising department, Czech Export Bank. Rated AA- Stable (Standard & Poor’s)/A1 Stable (Moody’s)

Francois Girod, deputy chief executive and head of capital markets, UkrSibbank, Ukraine. Rated B (Fitch)

Piotr Marczak, director of the public debt department, finance ministry, Poland. Rated A- Stable (Standard & Poor’s)/A2 Stable (Moody’s)

Vsevolod Starukhin, chief financial officer, DTEK, Ukraine. Rated B Stable (Fitch)/B2 Stable (Moody’s)

What mix of formats do you consider best to achieve your funding needs: bond or loan, public or private placements?

Piotr Marczak: Most of our financing is done via public placement of treasury bonds and bills. In local markets we have a well-established auction system for treasury securities and a reputable group of primary dealers. When issuing internationally in foreign currencies we use syndications. Loans or private placements are an auxiliary funding vehicle. However, we try to take advantage of the lower servicing costs offered by loans granted by the European Investment Bank or World Bank and use this source of financing to a maximum extent. Due to cost efficiency we are also open to considering private placements, including those in non-standard formats for us, such as registered bonds.

Francois Girod: UkrSibbank [USB] has always widely used different funding instruments such as Eurobonds, syndicated loans, bilateral loans, as well as placement of local bonds (in local currency Ukrainian hryvnia). Current priorities are deposits from clients of corporate, retail and private banking, as well as placement of local bonds in hryvnia.

In addition, USB closely co-operates with international financial organisations. USB has joined the European Bank for Reconstruction and Development [EBRD] Trade Facilitation Programme and is a member of the International Finance Corporation Global Trade Finance Programme. Participation in these programmes provides USB with low-risk access to challenging markets, enlarges credit lines and expands geographic coverage to service export clients. In 2009, USB raised $100m subordinated debt from the EBRD, and in 2010 another $140m. The EBRD is a 15% stockholder of USB. The majority (84.99%) is held by BNP Paribas, the strategic shareholder of USB.

David Franta: As a state-owned and guaranteed entity, Czech Export Bank’s funding needs are asset driven and are always a function of our funding priorities; that is, a well-diversified investor base and competitive pricing. To meet this goal on a long-term basis we use, besides loans, mainly our euro medium-term note [EMTN] programme, usually through private placements, as well as a euro commercial paper [ECP] programme for funding short-term assets. Nowadays, we are seriously considering tapping the German schuldschein [German law tradable loans] market to ensure meeting our investors’ appetite.

Bartosz Drabikowski: The primary source of funding for PKO Bank Polski has always been retail deposits. A few years ago we opened up to wholesale funding from international markets, to diversify the funding structure, to fund foreign currency denominated loans and just to gain recognition on the financial markets. Public bond issues, both in Polish zloty and foreign currencies, supplemented with dedicated loans from European development banks, seem to be the most appropriate instruments to achieve these goals.

Vsevolod Starukhin: DTEK gives preference to public instruments, all other factors being equal. Currently, however, borrowing directly from financial institutions is more advantageous for DTEK versus raising funds using public instruments. We expect this to remain unchanged in the short term. As of end-2011, our Eurobond issue [$500m, maturing in 2015] amounted to 25% of our total credit portfolio, with bank loans (including export credit agency financing) reaching 75%. In the medium term, we expect market conditions to change and will consider using public instruments for DTEK’s funding needs.

Until 2009, the dollar was the main currency for funding. But now the local currency [hryvnia] is prevailing due to the switch of lending to clients from foreign currency to local currency and limited lending activity in foreign currency

Francois Girod

What currencies do you consider using for funding?

Mr Girod: Until 2009, the dollar was the main currency for funding. But now the local currency [hryvnia] is prevailing due to the switch of lending to clients from foreign currency to local currency and limited lending activity in foreign currency.

Thus, the main focus for USB now is to develop a stable and diversified funding base in hryvnia, so the placement of bonds in hryvnia plays an important role. In 2012, USB has launched its domestic bond issue in local currency. The size of the debut issue is Hrv1bn [$122m], via a public placement. The issue was marketed among a wide circle of international and local investors.

Mr Drabikowski: So far we placed euro and Swiss franc denominated issues under our EMTN programme, which are best suited for the purpose of funding our foreign currency-denominated mortgage loans. Looking ahead, we are also considering issues in other large and liquid markets such as dollars.

Mr Starukhin: The natural hedging currencies for DTEK are Ukrainian hryvnia, dollars and euros as the group’s revenue is comprised of these currencies. Our strategy is focused on balancing debt and revenues in respective currencies. DTEK uses hedging instruments (such as swaps) to convert borrowings in other currencies, such as Russian roubles, into natural hedging currencies for the company.

Mr Marczak: The vast majority of our borrowing needs are financed in our local market [zloty]. We assume that the share of debt denominated in local currency should not be lower than 70%. The other natural market for us is the euro market. The share of euros in total foreign currency-denominated debt should be above 70%. Hence, we are a frequent issuer in that market, placing benchmark-size bonds at least once a year. In recent years, after a break of a few years, we also returned to the dollar market with benchmark-sized deals. We also regularly issue in Swiss franc and Japanese yen markets. However, our issuance in those two markets is much smaller in size.

Mr Franta: The strategy of Czech Export Bank with its funding activity is to target the currency of our credit portfolio. Therefore the vast majority of our bonds are euro denominated, with a minority in dollars and Czech koruna. However, we maintain strong investor relations and we are responsive to investor needs in terms of currency, size and maturity. Naturally, we follow the market conditions and do not overlook opportunities to lower our all-in costs using cross-currency swaps while hedging the currency risk.

How has the European financial squeeze and rating downgrades affected the market for your issues?

Mr Drabikowski: Shortly after PKO Bank Polski placed a SFr250m [$271m] bond issue in June 2011, the culmination of the eurozone sovereign crisis and the uncertainty regarding the condition of the European banking sector effectively froze the market. In these difficult times, the Polish government and PKO Bank Polski still managed to avoid rating downgrades, showing a remarkable resistance to the crisis.

Shortly after PKO Bank Polski placed a SFr250m [$271m] bond issue in June 2011, the culmination of the eurozone sovereign crisis and the uncertainty regarding the condition of the European banking sector effectively froze the market

Bartosz Drabikowski

In 2012, the banking crisis has been contained to some extent by a large and cheap liquidity injection by the European Central Bank [ECB]. As Poland is outside the eurozone, we do not have direct access to the ECB’s Long-Term Refinancing Operation [LTRO]. But since the LTRO has improved market conditions, we at least look forward to indirectly capitalising on it by placing a bond issue on reasonable terms.

Mr Girod: The European financial squeeze has had a sizeable impact on Ukraine’s risk premium. Ukraine sovereign five-year credit default swap (CDS) spreads soared from 405 basis points [bps] in April 2011 to 987bps in October 2011. The implied yield of 12-month non-deliverable forward contracts [NDFs] for the Ukrainian currency went up from 7% to 36% over the same period of time [indicating fears of a possible currency devaluation].

Some improvement has taken place recently, with five-year CDS spreads declining to 789bps in late March 2012, and NDF rates to 19% over the same period. International investor appetite for Ukrainian risk depends a lot on those two factors.

Mr Franta: Czech Export Bank benefits from the valuable fact that the Czech Republic, as its 100% shareholder and guarantor, experienced only upgrades of its ratings during the past 10 years or more. As a result we can present our investors with the increasing quality and stability of their investments.

When investors look at our fundamentals, they know that they are not just buying government-guaranteed debt but they are investing into a fundamentally strong bank with a long-term sustainable business model. On the other hand, the economic downturn and nervousness among investors in general resulted in our search for new opportunities in the funding area.

Mr Marczak: The creditworthiness of Poland has actually improved during recent years. Our ratings were not downgraded during the crisis and the outlook remained stable (by all major rating agencies). At the same time we witnessed a tremendous inflow of foreign capital into our domestic treasury bond market – holdings of foreign investors are at a record high level. Moreover, CDSs for Poland trade with tighter spreads than CDSs for most eurozone countries, and recently even inside the CDSs for France. All those positive factors combined resulted in a much more comfortable position for us as a debt issuer, with more flexibility and lower costs available.

Mr Starukhin: DTEK’s rating is constrained by Ukraine’s sovereign rating ceiling, which results in higher funding costs for our company than might otherwise be the case. Currently we attract most of our funding from financial institutions in the Commonwealth of Independent States [CIS] and Europe. Since Basel III requirements are coming into force to strengthen banks’ capital requirements and to toughen risk evaluation, European banks are increasing funding costs for borrowers, including DTEK. This has not so far affected the terms and conditions demanded by banks from the CIS region.

By its nature and given its officially declared mission, Czech Export Bank works successfully as a counter-cyclical force

David Franta

How have economic conditions affected your financing needs and repayment ability?

Mr Franta: By its nature and given its officially declared mission, Czech Export Bank works successfully as a counter-cyclical force, facing its biggest challenges and tasks in times of economic downturn. As such, we make frequent appearances on financial markets, match our assets and liabilities and increase our balance sheet. In this sense, a worsening of economic conditions has a positive overall impact on the size of the bank’s business. Also, due to the condition of the Czech economy we have experienced no problems with our repayment ability.

Mr Starukhin: Despite volatile economic conditions, DTEK has demonstrated strong financial performance in the past few years, with a compound annual growth rate in excess of 40% in 2008 to 2011, both for revenues and for EBITDA [earnings before interest, tax, deprecation and amortisation]. Our strategy of maintaining low leverage and significant capacity to take on debt has allowed the company to service its debt without any issues.

Mr Marczak: Poland was the only OECD [Organisation for Economic Co-operation and Development] country to avoid recession in 2009. On an aggregate basis for the past four years in terms of growth it has by far outperformed any other country from the EU. For 2012 we are again expected to be one of the leaders in gross domestic product growth.

The good economic situation certainly helped to moderate the slight deterioration in the fiscal position, which had translated into higher borrowing needs in recent years. As far as 2012 is concerned, about 50% of the target amount to be raised has already been covered. The improved liquidity position and the marked decline in the stock of short-term outstanding debt resulted in the decision taken by ratings agency Moody’s to assign a Prime-1 short-term rating – the highest possible – to the government of Poland.

Mr Girod: Thanks to sound liquidity management, the bank is processing all repayments duly and on time. For example, in 2011 USB repaid about $750m of its Eurobond format public debts. Timely repayment of such a large amount in the challenging external environment underlined the perfect reputation of USB as a reliable partner and confirmed the highest stability and reliability of the bank for its depositors and investors. Talking about recent trends, the increasing competition among Ukrainian banks for clients’ deposit funds in local currency was the main topic for 2011 and most likely will remain the same for 2012 as well.

Mr Drabikowski: Economic uncertainty and new regulations imposed by the Polish regulators have somewhat cooled down loan market dynamics. Although the bank is now in a comfortable liquidity position, we still want to maintain our presence on the financial markets. The bank enjoyed historically high financial results in 2011, including dynamic profit growth of 18.4% year on year. Its consistent financial strength is also marked by a solid capital base, with a Tier 1 ratio of 11.2% and an overall capital adequacy ratio of 11.2%.

Have you seen change or stability in the composition of your investor base over the past year?

Mr Starukhin: Our bondholder base is fairly stable and consists of high-quality investment funds and institutions that we meet with on a regular basis. Given Basel III bank capital requirements, we have seen a reduction in lending capacity from some European banks in Ukraine. However, this has been substituted to some extent by the growth of the top Russian banks in the region, which is also reflected in our creditor pool.

Mr Franta: Historically, we have built a strong regional investor base, as we are being seen as a risk-free investment by local investors. Considering the size of our issuing activity in the past, Czech Export Bank felt the need to broaden its well-established investor base and promote efficient price discovery. To follow this new strategy we came with a very successful first public benchmark bond issue in March 2012 [a €250m issue maturing in 2019]. This bond helped us expand and diversify our investor base significantly, increase the visibility of our bank on the capital markets, and showed us a direction for our future funding activities.

Mr Marczak: Over the past year we observed a stable level of approximately 50% of domestic treasury securities holdings by domestic institutional investors, a major investor group including local pension funds, insurance companies and mutual funds. There were some shifts within that group – lower holdings among the insurance sector were offset by higher holdings among pension funds, with mutual funds’ position being largely unchanged. Holdings among domestic banks were decreasing steadily (as the stock of treasury bills outstanding decreases), whereas holdings of foreign investors increased significantly. When it comes to non-residents, beside usual demand from European investors, we saw huge demand from US investors and rapidly growing interest from Asian accounts, including central banks and other official authorities.

Mr Girod: International investors in Ukrainian capital markets mostly come from Europe and the US, but rarely from Asia. It seems that this has not changed much since 2008. The composition of the investor base for local debt is stable but depends on the outlook for the local currency. International accounts are dominating the investor base when the outlook for the local currency is favourable.

Mr Drabikowski: We have seen stability in the composition of our investor base (both shareholders and debt investors) over the past year. There are two entities that hold, directly or indirectly, a significant shareholding: the state treasury (40.99%) and Bank Gospodarstwa Krajowego (10.25%). There have not been any significant changes in the structure of other shareholders by type of investors.

The bank’s debt investor base has also been relatively stable across all our issues. The bank’s debt was primarily placed with institutional investors from the financial sector (investment funds, insurers, pension funds, banks) both within the local market and across the wider European market.

Was this article helpful?

Thank you for your feedback!