Just as privatisation has become a symbol of Poland’s successful transition, asset sales have become less important to an economy where the private sector is now picking up the baton.
To see the digital version of this report, please click here.
To purchase printed copies or a PDF of this report, please email email@example.com.
When Marcus Svedberg used to visit Warsaw, he would always swing by the Treasury to discuss the latest round of sales of state-run assets. But on his latest trip to the Polish capital, in March 2014, chief economist at East Capital decided to re-jig his schedule.
Poland is in the midst of a mini-economic revolution. May 1 marks the 10th year of its accession to the EU, and the advances that the largest economy in CEE have made can be seen clearly in the legacy of the nation’s highly successful privatisation programme.
Since the turn of the century, the Polish government has raised US$24.9bn by shedding state assets, according to Dealogic, though earnings have slipped in recent years. The state earned US$7.6bn from asset sales in 2007, at the apogee of the privatisation process; by 2013 that number had declined to US$3.1bn.
The number of sales has also fallen sharply. Between 2009 and 2011, the government divested 760 state-run assets out of a target of 802. In 2012 and 2013 combined, that number fell to just 240, from a target of 300. Paweł Tamborski, Under-Secretary of State at the Ministry of Treasury, admits that the fervour to sell state assets has waned in recent years.
“Our current plan is to privatise 250 companies this year, the majority of which are rather smaller companies when compared with previous privatisation programmes”, with the aim of raising around US$1bn, said Tamborski. One-third of the total will come from the sale of small and medium-sized companies to Polish entrepreneurs, the larger of which, he added, might appeal to foreign investors. The remainder will comprise secondary sales, mainly accelerated bookbuilds – Tamborski admits there are no obvious candidates for initial public offerings in this year’s crop of assets.
Poland finds itself in a strange place. Its capital markets have developed apace over the past decade, precisely because the Treasury has aggressively promoted the sale of public assets, many of which were listed on the Warsaw Stock Exchange (GPW). The development of Polish capital markets and encouraging issuance from the private sector has been high on the Treasury’s agenda.
Svedberg said Poland was one of the few capital markets in emerging Europe with genuinely powerful domestic mutual and pension funds that are also leading players on the GPW, “so it is less dependent on external funds”.
But in December 2013 that all changed, when the Polish parliament passed a bill requiring open pension funds (OFEs) to transfer 51.5% of their assets, mainly Treasury bonds and Treasury bills, to the state’s Social Security Institution.
In a report in February titled “How the Polish pension fund reform will affect the fund’s investments” law firm Allen & Overy said: “OFEs with less money to spend mean that issuers looking for capital on the market may face more difficulties selling their securities at a satisfactory price or selling them all, which may in turn shift their attention to foreign investors with potentially deeper pockets.”
This creates a serious headache for the Polish Treasury. Tamborski has tried to dismiss the importance of the move to nationalise the majority of Poland’s private fund managers, saying it was little more than a vanity exercise, designed to trim the ratio of debt-to-economic output below the 50% mark.
Tamborski may or may not believe his own words when he said privatisations had become “less important from a budget revenue perspective and in terms of transformation of the Polish economy”. But the government’s actions will also more than likely cut the knees off the nation’s once-vibrant securities market.
“I do not expect that private issuance will immediately replace privatisations dollar for dollar,” said Karol Poltorak, director of Poland equity capital markets at Citigroup, though he added that the ECM market “will continue to be active, especially after the pension fund reform turbulence comes to an end”. In 2013, privatisations accounted for US$3.1bn, almost half the total volume of Polish ECM issuance, according to Dealogic.
That’s not to say the primary equity market will disappear entirely. Some sales are likely still to slip through the net. The US$700m IPO of utility Energa in December 2013, completed just as parliament was emasculating local private pension funds, was the largest on the GPW in two years.
The sale, led by JP Morgan and UBS, attracted more than 72,000 retail subscriptions. Tamborski said IPOs and follow-on equity sales had become “normal” financing tools for Poland-based corporates. The state is actively encouraging retail participation in what remains of its privatisation programme: retail investors now make up 16% of trading on the Warsaw Stock Exchange.
Georgy Egorov, head of emerging Europe ECM at UBS, said there was also crossover interest in Polish equity issuance from institutional investors based outside the region, notably, in recent months, from US funds.
“There are concerns that the Polish pension fund reforms announced last year would significantly affect the local investor base, but the outcome was more market-friendly than initially expected. In Energa’s IPO, which was multiple times oversubscribed, approximately half of the demand came from Polish institutions,” said Egorov.
Bankers are pinning their hopes on a rise in private sector issuance as Poland’s economy continues to expand, with new activity coming from private equity sales and the development of an equity-linked market.
Forecasters broadly predict the economy to grow by about 3% in 2014, with Svedberg tipping GDP to come in at north of 3.5%, a level, he believes, that could boost the size and number of local listings.
Filip Paszke, head of ECM, Poland, at Societe Generale, noted that the country, which has the sixth-largest EU population and a market of 40m consumers, still has demographics on its side.
“Over the next five years there are many mid-cap companies that could become national champions and look at foreign expansion,” he said. “They could quite easily tap the equity markets for their financing needs.”
According to Dealogic, in 2007 Polish ECM issuance was US$4.6bn and there were no privatisations, while last year, private Polish ECM issuance was US$3.4bn, the highest since 2007.
Deals from the banking sector also show how the government has rotated business between overseas banks in order to build out its local capital markets infrastructure. In January 2013, six international banks, including Deutsche Bank, Citi, Credit Suisse, Banco Espirito Santo and SG, were members of the syndicate when the government sold US$1.7bn of shares in the follow-on sale of Polish bank PKO. The sale of a smaller stake in the lender six months previously saw the likes of Goldman Sachs, JP Morgan and UBS work on the mandate.
Laurent Cassin, head of ECM, UK and CEEMEA at SG, said: “The Treasury has developed the market very intelligently so there has been a mutually beneficial relationship between the ministry and investment banks, and there are now 10 banks in the country that are experienced in transactions.”
SG is in discussions with several issuers about equity-linked deals, which could be, said Cassin, the “next frontier” for Poland’s ECM market. In January, the Paris-based lender joined forces with Barclays Bank, Deutsche Bank and HSBC on a bond issue from Czech utility CEZ exchangeable into shares of Hungarian oil and gas group MOL. The 3.5-year €470.2m offering was priced with a zero coupon and an initial exchange price of €61.25 per share, a 35% premium. “This provides a clear demonstration that CEE issuers can sell equity-linked deals,” Cassin said.
Poland also hopes to continue sucking in listings and secondary offerings from across the region. Citi’s Poltorak pointed to a relatively robust pipeline of non-Polish issuance in the country, though the pipeline of Ukrainian equity sales, a key provider of fresh IPO blood in recent years, is likely to remain inactive while the conflict with Russia persists. “If you are a Central European company that is small by Western standards and trying to sell shares, the Polish market is one of only a few offering size and liquidity,” he said.
There are also untapped opportunities in regional money pools in countries including the Czech Republic, Slovakia, Hungary and Romania. If loose ongoing merger discussions between the Warsaw and Vienna exchanges develop, then this money could be better integrated into the system and deployed to issuers from across the region.
“If the management of the Warsaw and Vienna stock exchanges came to the government with a transaction that would have upside from a macro and micro perspective, then we would support the deal,” said Tamborski.
Although private sector deals will be smaller, the fees charged by banks should rise over time. SG’s Cassin said domestic equity capital markets still retained considerable potential, pointing to a raft of new hires by its Polish investment banking desk, including head of ECM Paszke.
“There is a lot of cash sitting on the sidelines in Poland,” said UBS’s Egorov. “But as Russia, which was a big generator of volumes in the past, is not the flavour of the season, and Turkey faces uncertainty ahead of presidential elections, investors are happy to look at Poland and it is likely to remain a pretty active market for UBS.”