Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Polish Corporate Bond Market


Published on

Published in: Business, Economy & Finance
  • Be the first to comment

  • Be the first to like this

Polish Corporate Bond Market

  1. 1. Corporates  Poland  Special Report  Polish Corporate Bond Market  Analysts  Summary  Arkadiusz Wicik, CFA Fitch Ratings believes that the Polish domestic corporate bond market, which has +48 22 338 62 86 experienced a slowdown in issuance to‐date in 2009, may revive in 2010. Bond issuance is considered an attractive funding option by a number of large corporates Raymond Hill with solid creditworthiness as bank loans are more difficult and costly to raise than +44 20 7417 4314 before the global funding crisis. In addition, there is increased investor demand for  corporate bonds with strong credit ratings as they offer a hefty credit spread over treasury bonds. In this environment, several Polish companies operating in the Related Research power and oil and gas sectors announced plans to launch sizeable corporate bond · Poland (May 2009) issues in the domestic and international bond markets in 2010 mainly to fund rising · Polish Corporates Face Economic Slowdown capital expenditure. and Funding Challenges in 2009 (February 2009) Despite expected increase in corporate bond issuances in 2010, the agency does not · South African Bond Market Overview (October 2009) envisage a major structural change in external financing of the Polish corporate sector as bank loans are expected to remain the largest source of debt for corporates in the next five years. The agency notes that the domestic bond market has become more selective for issuers due to increased risk aversion of bond investors and banks arranging the issues. As a result, companies with weaker credit quality or small and medium‐sized entities are not likely to be frequent issuers of domestic corporate bonds at least until the economy returns on a path of strong growth. One of the obstacles of the domestic bond market is limited liquidity, transparency and scarce information on bond pricing, credit spreads and default statistics. The agency believes that Catalyst, a new trading platform for the secondary bond market launched by the Warsaw Stock Exchange and BondSpot S.A. on 30 September 2009, has the potential in the medium to long term to increase investors’ interest, in particular institutional investors, in this asset class by improving market liquidity, transparency and information on bond valuation.  Market Development  Polish Corporate Bond Market in 2009 The corporate bond issuance in the domestic market slowed down in January to September 2009 as the economic slowdown and weaker economic outlook caused companies to reduce their borrowings and scale back capital expenditure plans. In addition, it became more difficult to place bonds in the domestic market due to increased aversion of investors to corporates with higher credit risk. As a result of redemption of maturing bonds and lower new issuance, the outstanding value of domestic corporate bonds with maturities of over one year declined by 9% to PLN13.7bn (EUR3.3bn) at end‐September 2009 from PLN14.9bn at end‐December 2008. Fitch believes that first signs of recovery were seen in September 2009, when corporates issued PLN1.2bn bonds with maturities of over one year following limited issuance from January to August 2009 of only PLN0.3bn. The commercial paper segment, which includes issuance by corporates and banks declined by 6% to PLN12.2bn between December 2008 and September 2009 (see the Debt Issuance by Polish Companies table). The same declining trend, albeit less pronounced, was evident in bank loans to companies, which decreased by 1% between December 2008 and August 2009 to PLN213bn, according to National Bank of Poland data. This was partly driven by  14 October 2009 
  2. 2. Corporates banks’ increased restrictions to corporate lending resulting in substantially higher credit spreads for corporate borrowers, increased loan security requirements and also tightened lending policy related to higher risk sectors or companies. The decline in corporate bank loans also stems from weaker corporate demand for external funding in the unfavourable economic environment. The only growing segment in 2009 to‐date has been corporate bond issuance in the international markets. The outstanding value of this segment rose to PLN5.7bn at end‐September 2009 from PLN2.9bn at end‐December 2008. This growth was driven by two issues by Telekomunikacja Polska S.A. (‘BBB+’/Stable), which through its finance subsidiary issued bonds with a total value of EUR700m in May and July 2009. Despite the increase in 2009, the international issuance of bonds by Polish companies is well below the level seen in 2005 as several companies have redeemed their long‐term bonds between 2006 and 2008 and new issuance has been limited. Debt Issuance by Polish Companies (Outstanding debt in PLNbn at end of period) 2005 2006 2007 2008 Sep 09 Corporate bonds in the domestic market (maturity over 365 days) 8.9 8.8 13.9 14.9 13.7 Corporate bonds in the international markets (maturity over 365 days) 9.5 7.2 4.5 2.9 5.7 Total corporate bonds (maturity over 365 days) 18.4 16.0 18.4 17.8 19.4 Commercial papera 8.6 12.9 13.8 13.0 12.2 a Commercial paper include issuance by corporates and banks Source: Fitch Polska Case Study: Selected Bond Issuers In 2009 Telekomunikacja Polska S.A. (TPSA) TPSA, Poland’s leading telecoms operator, was one of the first central European corporate issuers together with Czech Republic’s utility CEZ, a.s. (‘A‐’/Stable) to tap the eurobond market following the global financial crisis in 2008. TPSA, which used to be a frequent bond issuer in the international markets, established a EUR1.5bn European medium‐term note (EMTN) issuance programme in May 2009. Its finance subsidiary TPSA Eurofinance France S.A. issued bonds of EUR500m in May 2009, followed by a tap issue of EUR200m in July 2009. The bonds have a coupon of 6%, are due in May 2014 and are guaranteed by TPSA. The company issued bonds in order to rebalance debt structure between bank loans and bonds, extend debt maturity profile and secure liquidity in anticipation of refinancing needs in 2010‐2011. Miejskie Wodociagi i Kanalizacja w Bydgoszczy Sp. z o.o. (MWiK) In June 2009, MWiK (revenue bond rating of ‘BBB‐’), a water company operating in the City of Bydgoszcz (‘BBB’/Stable), issued in secured revenue bonds of PLN100m due in 2029. The issue was launched in the domestic market under the company's secured revenue bond programme of PLN600m, which is intended to co‐fund MWiK's sizeable capex programme of PLN1bn. The June 2009 bond issue was oversubscribed. Since 2005, MWiK has issued bonds totalling PLN320m and plans to issue the remaining PLN280m under the programme over the next few years. MWiK bonds maturing in 2024 and 2029 have one of the longest maturities among domestic corporate bond issuers. Increased Credit Spreads Fitch notes a substantial increase in credit spreads in the domestic bond market as well as bank loans in 2009. The spreads on bonds of issuers rated in the ‘BBB’ category rose to about 200‐300 basis points over WIBOR from about 30‐50 basis points before the funding crisis. However, the increase in borrowing costs for such issuers was less pronounced, as the widened spreads were mitigated by lower base rates as the three‐month WIBOR declined to 4.2% from 6.5% in June 2008. Polish Corporate Bond Market October 2009  2 
  3. 3. Corporates Domestic Non‐Government Bond Market Corporate bonds are the largest asset class of the non‐government domestic bond market, accounting for 32% of the total market value, followed by the CP segment (28%), bank debt (27%) and municipal bonds (13%). The value of the domestic non‐government debt market decreased by 4% between December 2008 and September 2009, following several years of strong growth (see Polish Non‐Government Domestic Debt Instrument Market table) as corporates and banks reduced their borrowings from bonds, commercial paper and other debt instruments. The municipal bond segment remained on a growth path despite the economic slowdown. Polish Non‐Government Domestic Debt Instrument Market (PLNbn, outstanding debt at end of period) 2005 2006 2007 2008 Sep 09 Commercial paper 8.6 12.9 13.8 13.0 12.2 Corporate bonds (over 365 days) 8.9 8.8 13.9 14.9 13.7 Bank debt (over 365 days) 4.3 6.0 10.8 12.4 11.6 Municipal bonds 3.3 3.8 4.1 4.5 5.4 Total debt 25.1 31.6 42.6 44.8 42.9 Source: Fitch Polska As in many other counties in the region, including the Czech Republic, Slovakia, Hungary and Turkey, the domestic bond market in Poland is dominated by government debt, which constitute about 91% of total outstanding debt (at end‐ June 2009), followed by non‐government debt (9%). Corporate bonds versus bank loans According to the agency’s estimates corporate bonds account for about 10% of the total debt of Polish companies as bank debt remains the predominant funding source for the corporate sector, constituting about 90% of the total debt. Polish Corporate Debt by Source of Funding  Outstanding Amount at Period­End  Bank loans Corporate bonds a  Commercial paper b  (PLNbn  200 150 100 50 0 2005 2006 2007 2008 Aug‐09 a Corporate bonds issued in the domestic and international markets b Commercial paper include issuance by corporates and banks Source: National Bank of Poland, Fitch Polska  Planned Corporate Bond Issues  Among companies that plan large bond issues is Poland’s largest power group, PGE Polska Grupa Energetyczna S.A. (PGE, IDR of ‘BBB+’, senior unsecured rating of ‘A‐’), which plans a eurobond issue of at least EUR500m within the next six months. The proceeds will be used to co‐fund the capex programme. Another large state‐ owned power group, Tauron Polska Energia S.A., also plans a bond issue in the medium term to raise funds for substantial capex. Polish oil and gas company Polskie Gornictwo Naftowe i Gazownictwo S.A. (PGNiG) may be another significant issuer as it considers about PLN4.5bn bond issue in the Polish Corporate Bond Market October 2009  3 
  4. 4. Corporates domestic and international market in 2010 in order to refinance maturing syndicated loan facility and fund capital expenditure. Fitch believes that the eurobond market may be a viable option mainly for highly‐ rated Polish issuers planning to raise large debt, of EUR300m and above. Otherwise, such amounts may be difficult to raise through syndicated bank loans in the current constrained bank loan markets or in the domestic bond market given its limited depth. The first nine months of 2009 saw increased investor demand for investment grade corporate bonds in Europe and record corporate issuance. According to Fitch estimates about PLN2.3bn of corporate bonds issued in previous years matures by the end of 2010 and a part of this is likely to be refinanced by new bond issues, particularly in the case of issuers with solid financial standing. For instance, Polish railways company Polskie Koleje Panstwowe SA issued five‐year PLN650m bonds in September 2009 mainly to redeem its maturing bonds. The bonds are guaranteed by the state. The agency expects that new issuers of revenue bonds may tap the domestic bond market in 2010, as municipal companies plan to fund their large capex plans related to infrastructure projects in the water sector and transportation, which are often co‐funded by the European Union. Revenue bonds combining municipal and corporate risk, which usually have long‐term maturities, are often purchased by institutional investors with long‐term investment horizon, such as pension funds.  Market Infrastructure  Investors of Other Non­Govern­  Originators, Arrangers and Investor a  ment Debt  , end­ August 2009  Base Insurance  Other  According to Fitch Polska S.A., 77 issuers co mpanies 4%  P ensio n  4%  had outstanding domestic corporate funds  Companie  s  39%  bonds with maturities of over one year at 7%  end‐September 2009. In addition, three Fo reign  Polish corporate issuers had outstanding entities  1 %  1 eurobonds. Investment funds  B anks  14%  21%  The main arrangers of domestic corporate bonds include domestic banks, a This catego ry comprises mainly co rpo rate bo nds  which are active in corporate finance Source: The Natio nal B ank o f P o land  services, including Bank Pekao SA (‘A‐’/ Negative), ING Bank Śląski (‘A’/Stable), BRE Bank SA (‘A’/Stable), Bank Handlowy w Warszawie (Support Rating of ‘1’) and Powszechna Kasa Oszczednosci Bank Polski (Support Rating of ‘2’). Among the largest investors of domestic corporate bonds are companies, banks and investment funds (see the Investors of Other Non‐Government Debt chart). Fitch estimates that a substantial part of corporate bonds purchased by companies are intra‐corporate group bond programmes related to cash management within a group. In such programmes, companies with liquidity needs issue intra‐group bonds to companies with a liquidity surplus. Such programmes were launched by several Polish issuers rated by Fitch, including PGE, Polski Koncern Naftowy ORLEN S.A. (PKN, ‘BB+’/Rating Watch Negative) and TPSA. According to Fitch estimates, intra‐ group bonds accounted for around 15% of outstanding corporate bonds with maturities over one year at end‐September 2009. In addition, some corporate bond issues are effectively quasi‐bank debt as the banks arranging the transactions purchase the bonds, for instance through full underwriting and these issues are not always sold to investors at a later stage.  Polish Corporate Bond Market October 2009  4 
  5. 5. Corporates Primary and Secondary Market Despite its growth in recent years, the Polish non‐government bond market is underdeveloped in value and infrastructure terms compared with some other emerging market countries’. Its value is much lower than the domestic markets in Russia, South Africa or its regional peer, the Czech Republic (see the charts Non‐ Government Debt Market in Selected Emerging Markets, and Corporate Funding — Domestic Debt Securities and Bank Loans as % of GDP). Fitch considers the transparency of the Polish non‐government bond market to be limited currently as the vast majority of domestic bond issues are launched as private placement with limited information on credit spreads and investor base. The secondary market, existing in the form of trading offered by the banks arranging the bond issues, has low liquidity and limited bond pricing information. The agency believes that the recent start‐up of Catalyst, an organised market in debt securities, has the potential to improve the liquidity and transparency of the corporate bond market. However, this will take time and any major qualitative changes to the domestic market are unlikely in the short term. Catalyst will facilitate corporate and municipal bonds issuance and provide secondary trading for qualified and individual investors. The trading platform is also likely to improve investor access to timely information on issuers given Catalyst’s disclosure standards.  Non­Government Debt Market in Selected Emerging Markets at End­2008  (USDbn equivalent)  Co mmercial P aper  Co rpo rate B o nds  B ank Issuance  M unicipal B o nds  80  60  40  20  0  Russia  So uth A frica*  Czech Republic  P o land  Hungary  * Data fo r So uth A frica at end­M arch 2009  So urce:  Fitch P o lska,  Central B ank o f Russian Federatio n and cbo , the B o nd Exchange o f  So uth A frica,  Czech Natio nal B ank, Hungarian Financial Superviso ry A utho rity  a Corporate Funding ‐ Domestic Debt Securities and Bank Loans as % of GDP (At YE08)  Domestic debt securities by corporate issuers as % of GDP Bank loans to non‐financial corporations as % of GDP 50% 40% 30% 20% 10% 0% Spain Italy France Germany Czech Republic Poland Hungary a  Domestic debt securities by corporate issuers in Poland based on Fitch Polska data  Source: Fitch, Bank for International Settlements, European Central Bank  Conclusion and Outlook  The agency believes that the tightened credit market conditions and expected increase in issuance by corporates with stronger business and financial profiles are likely to increase the share of bond issues with lower credit risk in the total domestic bond market. It remains to be seen to what extent the economic Polish Corporate Bond Market October 2009  5 
  6. 6. Corporates Fitch Public Ratings for Corporates in Poland Bonds Bonds outstanding as a % total Issuer Rating Outlook at YE08 (PLNm) debt at YE08 Miejskie Przedsiebiorstwo Komunikacyjne ‐ Revenue Bond Rating of ‘BBB‐’ n.a. 165 44.7 Lodz Spolka z o.o. (MPK) Miejskie Wodociagi i Kanalizacja w Revenue Bond Rating of ‘BBB‐’ n.a. 230 100.0 Bydgoszczy Sp. z o.o. (MWIK) Orbis S.A. National Long‐Term Rating of Negative 0 0.0 ‘BBB+(pol)’ PGE Polska Grupa Energetyczna S.A. (PGE) IDR of ‘BBB+’ Stable 1,632 21.7 Polski Koncern Naftowy ORLEN S.A. (PKN) IDR of ‘BB+’ Rating Watch Negative 1,205 8.6 Przedsiebiorstwo Wodociagow i Kanalizacji National Long‐Term Rating of Stable 0 0.0 Sp. z o.o. Olsztyn (PWIK) ‘BBB(pol)’ Telekomunikacja Polska S.A. (TPSA) IDR of ‘BBB+’ Stable 1,276 17.6 Fitch also rates 23 municipalities, five regions, 12 financial institutions and two insurance companies in Poland Source: Fitch downturn will impact the credit quality of issuers operating in more cyclical sectors and default statistics of bonds issued at times of stronger economic growth. Only a limited number of domestic corporate bond issuers have assigned credit ratings (see the Fitch Public Ratings for Corporates in Poland table). The agency expects that more issuers in the domestic market will seek to obtain ratings as bond investors increase their emphasis on the creditworthiness of issuers. Fitch believes that a more widespread use of ratings, be it national or international ratings, is likely to increase the transparency of the domestic bond market. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. Copyright © 2009 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004.Telephone: 1‐800‐753‐4824, (212) 908‐0500. Fax: (212) 480‐4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. All of the information contained herein is based on information obtained from issuers, other obligors, underwriters, and other sources which Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of any such information. As a result, the information in this report is provided "as is" without any representation or warranty of any kind. A Fitch rating is an opinion as to the creditworthiness of a security. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed, suspended, or withdrawn at anytime for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax‐exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of Great Britain, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. Polish Corporate Bond Market October 2009  6