It is amazing to recall now that the IPO by Czech coal mining group NWR was more than seven times covered and priced at the top of the range at the beginning of May last year.
That encouraged the Polish government to prepare five privatisation IPOs and selldowns, including energy group Enea, banking group BGZ and chemicals maker Zaklady Azotowe Tarnow.
But, even before the banking crisis got into full swing in September last year there were signs that investor sentiment towards Central and Eastern Europe was beginning to wane. The Z294m (US$117.6m) IPO of ZAT in June was only completed because two strategic investors came to the rescue at the last moment, after institutional investors showed little interest.
That led the Polish government to delay the US$1bn IPO of energy group Enea until September. The move surprised the market, given its qualities as a large, defensive stock. It was almost fatal because the deal then had to pause after two weeks of premarketing while the markets waited for the US administration to put together a rescue package for the US banking sector. When it resumed in late October it was aimed almost entirely at strategic investors.
A month later came the unsurprising news that the Z600m IPO of coal mining group Bogdanka and, more symbolically, the IPO of the Gielda Papierów Wartosciowych w Warszawie (Warsaw Stock Exchange) had both been cancelled.
The Polish government has since opted for an auction in the case of the Warsaw exchange, but has barred the Wiener Boerse (Vienna Stock Exchange) from participating because of its desire to see one of the major European exchanges, such as Nasdaq OMX and Euronext, take control.
While some large new issues on the Warsaw exchange have been delayed over the past year, it continues to challenge the London Stock Exchange as the venue for emerging market stocks. Some issuers have recently expressed concern that index tracking funds in the UK introduce volatility into stock performance. The issue is not so common elsewhere because there are fewer funds and trackers focus on just the main indices and therefore cover fewer stocks.
However, bankers believe that while there may be opportunities for other venues to pick up listings, the LSE still retains powerful advantages over some of its peers as a solid, international market with experienced regulators and operators.
The speed of the deterioration of the region’s economic conditions is illustrated by the Czech government’s economic growth forecast, which at the start of the year stood at 2.9% for 2009. By the end of March the governor of the country's central bank was talking openly about the possibility that the economic activity might actually decline by 2% during the year.
Towards the end of 2008 the market's attention turned to the high level of exposure of Nordic banks to the troubled Baltic states, and the possibility of large scale defaults on corporate loans. That led several major Swedish banks, including Swedbank and SEB Enskilda, to bolster their capital positions via large rights issues.
Political instability has also risen in the region, exemplified by the recent resignation of the Hungarian prime minister and the collapse of the Czech government after it lost a confidence vote in parliament. While the Polish government appears to have avoided similar political fallout, some investors are worried about the level of foreign currency loans that some Polish companies have taken on. Concerns about their ability to repay them have contributed to the 20% fall, in dollar terms, in the Polish market in recent months.
"The large domestic investment funds in Poland, which were net buyers for a long time driven by the growth of the Polish pension industry, have been net sellers of equities since Q4 of 2007, said Tom Attenborough, a managing director in ECM at Citigroup.
The economic downturn has forced investors to recognise the big differences between the markets in the region. Those within the EU are, generally, proving more stable than those outside. But even within the European fold investors are increasingly distinguishing between countries such as Hungary, which has structural problems, and those like Poland or the Czech Republic that do not.
"Going forward investors will look more at company/industry/country specifics rather than at a general emerging markets play", said Francis Kucera, a Linklaters capital markets partner specialising in emerging markets. "Investors are now much more aware of the wide spectrum of political stability in the region. That is significant as, in good times, business prospers without government action, but in recessionary times, when structural support is needed, political stability required to pass import measures is crucial."
Other bankers point to the changing nature of institutional investors and their strategies.
"The current financial crisis has shown just how global many emerging market investors really are, and the speed with which they can move their assets from one market to another," said Reinout Koopmans, co-head of CEEMEA ECM at Deutsche Bank.
The sharp reduction in deal volumes has had significant effects on the size of ECM teams and their pitching strategies. "Recently we have seen major competition among banks," said Aleksander Grad, Poland's Treasury minister with overall responsibility for the country's extensive privatisation program.
Some regional bankers report big changes in the way some banks operate in the region. "Some of the global houses have disappeared from the pitching process completely (in CEE) and some regional banks have drastically cut back their activities to just one or two countries," said Koopmans.
With low levels of new issue activity in CEE, large deals have become even more important and high profile than before, as evidenced by the high level of interest in pitching for Telekom Srbija's IPO last autumn.
Prospects for issuance over the next six months in the region depend largely on whether the privatisation IPO of PGE goes ahead and proves successful. The odds are against it but, if it happens, a number of other deals would likely follow later in the year.
The bank sector could see some activity in the form of follow-on deals and state selldowns. Many of Poland's major banks are foreign-owned and their parent groups are very concerned about the exposure of their loan portfolios in the country. They are therefore cutting back their lending, leaving a void for other banks to fill. However, many of them lack the capital at the moment, paving the way for future issuance. International investors would see that as a positive investment case and might well be prepared to participate on a limited basis, said Deutsche's Koopmans.
The state-controlled PKO Bank Polski recently sent out RFPs for a capital increase. Its size and structure is not yet known, but some companies are known to be looking at rights issues as a possible avenue for funding.
"A number of investment banks have approached us for advice on rights issues for Polish companies," said Kucera. "The deals are at the structuring stage and people are simply asking how they might go about it because it is such a rare deal type in Poland." There is little appetite for fresh equity among new investors, and existing investors are more likely to step up because they understand the business already. If one or two rights issues were completed successfully in the CEE region, several more could follow quickly.
Beyond PGE few bankers expect to see any IPOs this year. Pitching is currently underway on an IPO of Poland's second-largest energy group Tauron, although that deal is not scheduled for this year. While there is still some domestic appetite for new equity in Poland, there is not the depth required for the larger privatisation IPOs. With many international investors short on cash and preferring opportunities elsewhere it is difficult to see where the demand is going to come from in the short term.
In Romania there is still strong political backing for the privatisation program but, as is also the case in Hungary, there is a question about where the liquidity is going to come from. Investors who only began to broaden into emerging European investments 18 months to two years ago have largely disappeared from the region. The more experienced, dedicated emerging markets funds are still around, but are having to be more selective.
"We believe that there are deals waiting to come into the pipeline from Poland, although some are more likely to come in 2010. Investors are waiting to see how the recent mini-rally we have seen in western European markets develops", said Citi's Attenborough.
With generalist funds focusing on opportunities in their home markets, there will be fewer willing to consider emerging market offers. In the short term issuers and banks will have to keep deals as simple as possible to reach the widest audience.