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The Slovak capital market has been one of the least active in CEE. Bank deposits are the preferred way of saving, and bank loan financing has long been almost the exclusive source of funds for local corporates. The government and banks with their mortgage-covered bonds have been the only active issuers in the Slovak market. The result is that market capitalization was less than 5% of Slovak GDP in 2012, compared to almost 20% in the Czech Republic and almost 40% in Poland. However, the situation is slowly changing.

In the Beginning Was Tax

In 2013, withholding tax on income from Slovak bonds was abolished for most investors. Currently only Slovak natural persons and non-profit organizations pay withholding tax. Foreign investors are generally not subject to Slovak taxation on bond income at all. This change was an enabling factor for major Slovak issuers to enter the Eurobond market, as both Eurstream (EPH) and Zapadoslovenska energetika (E.ON) did in 2013. In addition, the R1 motorway PPP project was refinanced by a EUR 1.2 billion bond issue by the concessionaire Granvia, a Slovak joint venture of Vinci and Meridiam. Intragroup bond financing may get further stimulus from the introduction of thin capitalization rules from January 1, 2015, as it is expected that the rules will treat bonds more favorably than intragroup loans. 

Strategy for Development of Capital Markets

In spring 2014, the government adopted a mid-term strategy for the development of the Slovak capital market. The strategy was prepared in cooperation with the National Bank of Slovakia (the Slovak capital markets regulator), the Bratislava Stock Exchange, and industry bodies. It sets out a number of specific actions to be taken by the government at the legislative and public policy level aimed at unlocking the potential of the Slovak capital market. The measures include the introduction of new types of investment instruments, as well as modernization of the existing legal framework for bonds, investment certificates, and derivatives. Important changes are contemplated in the regulation of collective investments, pension funds, and market infrastructure, mainly by reforming the Slovak securities registration system.

Seeds of Debt Capital Market

Capital markets tend to evolve from seeds, such as offerings of bonds by government agencies or major corporates. A feasibility study of retail government bond offerings is currently being prepared. Traditionally, Slovak government bonds are placed through bank syndicates or directly via auctions. The direct economic incentives of retail offerings, which tend to be more costly than wholesale transactions, are questionable. But there are emerging clusters of issuers around major Slovak investment groups. Some of them are financial conglomerates, including banks, investment firms, and asset managers, and all are able to place instruments issued by related corporates within their groups and into their relatively broad client bases. Local bond issues tend to be smaller, typically between EUR 10 million and EUR 30 million. Notable exceptions are the recent two tranches of bonds issued by Tatry Mountain Resorts, CEE’s largest ski resort operator, with a combined size of EUR 180 million.

New Bond Legislation

On September 1, 2014, a major amendment to Slovak bond legislation entered into force. As part of the previously-mentioned wider government strategy, the amendment introduces concepts established in most western jurisdictions which were not previously recognized under Slovak law 

Another major improvement is the introduction of secured and subordinated bonds. These have been used in Slovakia in the past, but have had to be created on a “contractual” basis with no legislative support. In the context of the secured bonds, Slovak law for the first time now recognizes the concept of security agent. An issuer’s obligations can be secured by entering into a pledge agreement with the security agent who has the right to enforce for the benefit of all bondholders. The security agent is a specific example of a new broader concept of bondholders’ representative, able to take certain actions towards the issuer, such as monitoring bond covenants and requesting information or remedy. Slovakia is a civil law jurisdiction, of course, so these concepts should not be confused with common law trust. More likely, the new concepts will be interpreted by jurisprudence and case law along the lines of traditional concepts of agency and commission.

Other improvements include providing statutory infrastructure for bondholder meetings, the possibility of changing the terms and conditions, and generally reducing the amount of administration associated with a bond transaction.

Conclusion

It’s too early to declare the recent developments a sign of a long-lasting trend, but the factors described above, coupled with further improvement in the legal and regulatory frameworks and suitable market conditions, can support further growth in the Slovak capital market. Because of the size of the Slovak economy, it is unlikely its capital market will ever become substantive even in regional terms. But it can provide a viable alternative to bank financing and tangible benefits for real economic growth.

By Renatus Kollar, Partner, and Peter Jedinak, Senior Associate, Allen & Overy

This Article was originally published in Issue 6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

2014 has been a record year for the Polish high yield bonds market. High yield bonds (i.e., bonds with a rating of Ba or lower according to Moody’s or BB or lower on the Standard & Poors or Fitch Ratings scales) typically offer investors a higher return than other types of debt instruments because they carry a greater risk that the issuers will default on their payment obligations under the bonds.  

As the yields remain reasonably attractive and defaults are low, high yield bonds have become increasingly attractive for Polish companies, which are taking advantage of the recent change in sentiment towards emerging markets. In 2014, six high yield bond transactions considered by Polish companies reached at least the road show stage. Three were successful, namely: P4 sp. z o.o., a Polish mobile telecoms operator, on two high yield issuances (i.e., a EUR 870 million and PLN 130 million dual-tranche high yield bond issue, and EUR 415 million senior PIK toggle notes), and Synthos S.A., one of the leading manufacturers of chemical raw materials, on a EUR 350 million high yield bonds issue. White & Case worked as the company’s legal counsel in all of them.

Until recently, companies from Poland entered the high yield bond market only if they could not find what they wanted in the loan market. Now, perceiving a number of advantages of high yield bonds over syndicated loans, corporate issuers in Poland have started to switch from bank funding to the high yield market. For instance, in an issue of high yield bonds, an issuer can usually access a much wider group of potential investors than with a syndicated loan, which – depending on demand at the time – means that the issuer can pay a more competitive price for borrowing than with a bank loan when the same terms are compared. Also, high yield bonds are transferable instruments that can be traded on international capital markets (for Polish corporates the most common are the Luxembourg and Irish stock exchanges), so investors needing to realize their investments need not wait until the maturity date. Finally, as high yield bonds are subject to a credit rating, this allows investors to evaluate the ability to pay interest and principal and may also strengthen the credibility of the issuer. All of these may give an issuer access to willing lenders when a bank loan might not be possible or desirable. 

Additionally, the terms and conditions of high yield bonds generally contain far fewer and less stringent covenants than are found in syndicated loans. The covenant package commonly used for high yield bonds contains no financial maintenance covenants (which require the periodic testing of financial ratios to gauge the issuer’s economic condition), and only contain less onerous incurrence covenants (that can only be breached by taking some restrictive action, such as taking on new debt obligations or disposing of assets). As the financial covenants are tested only when the issuer’s group takes a particular action, they gain more flexibility in running their business in cyclical periods. Additionally, high yield bond structures do not include debt amortization and provide for repayment of the principal at the maturity date, which allows for improvement of the issuer’s cash flow position. Last but not least, high yield bonds are frequently unsecured (only corporate guarantees are granted by the issuer’s parent or restricted subsidiaries), whereas traditional syndicate loans are secured.

As a result of these advantages, the high yield bond market has not only become a refinancing mechanism on its own, allowing the refinancing of bank debt and older bonds, but has also – as in the case of P4 sp. z o.o. – shown advantages over bank financing when considering leveraging the issuer. In the P4 case, the issuer simultaneously ran two competitive streams of works (a high yield transaction vs. a syndicated loan project) with a different group of banks, comparing terms available on the market (the so-called dual-track), before ultimately deciding to use a high yield transaction.

Driven by investors’ demand for yield and appetite for risk, institutional investors are finding high yield bonds of Polish companies more attractive and less volatile over time than equities. Recently, institutional investors have become more sensitive to geopolitical concerns about destabilization of the situation in Ukraine and related EU sanctions imposed against the Russian Federation, about concerns over the global economy, and about the outlook for the Eurozone. However there is still significant room for growth of the high yield bond market in Poland, and corporate issuers will take advantage of this source of financing.

By Marcin Studniarek, Partner, and Bartosz Smardzewski, Associate, White & Case

This Article was originally published in Issue 6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

On March 15, 2014, Act XVI of 2014 on collective investment vehicles and alternative investment managers (the “Collective Investments Act”) and Act V of 2013 on the Civil Code (the “New Civil Code”) entered into force. The simultaneous entry into force creates a rather unusual situation: the Collective Investments Act purports to create a regulatory environment where free and available equity easily matches with the best investment opportunities, whereas certain aspects of the New Civil Code seem to hinder the public collection of investments (irrespective of the quantity and source) in the course of  establishing a public limited company.  

The Collective Investments Act

The Collective Investments Act was enacted in order to implement the rules of Directive 2011/61/EU of the European Parliament and of the Council on the Alternative Investment Managers (the “Alternative Investment Directive”), which regulates the establishment and operation of alternative investment fund managers and the alternative investment funds they manage. As a result of the Alternative Investment Directive, the Hungarian investment environment has become more structured and diverse in terms of investment vehicles. By characterizing various investment vehicles, regulators intended to ensure that investors are capable of finding the one which complies, to the fullest extent possible, with their investment strategies and risk appetite. 

To follow this logic: a general investment vehicle under the Collective Investments Act is one which collects funds from several investors for investment in line with their investment strategies. As another level of specification, the Collective Investments Act further differentiates undertakings for collective investment in transferable securities regulated under  Directive 2009/65/EC of the European Parliament and of the Council (the “UCITS”), and the alternative investment funds regulated under the Alternative Investment Directive (the “AIF”). Establishing a regulated environment for AIFs may result in finding additional investment from investors who previously avoided this type of investment vehicle due to the lack of an established regulatory framework

Based on the Collective Investments Act, every collective investment fund that is not an AIF shall be considered a UCITS – the major difference being that a UCITS primarily invests in transferable securities while an AIF primarily prefers other forms of assets (such as corporate shares and real estate) to invest in. UCITS are preferred mainly by non-professional investors, as even smaller proportions of investments may be utilized. By contrast, the newly-regulated AIFs attract professional investors, especially as private equity funds and venture capital funds are now statutorily categorized in this category. The principal reason for this may be that the investment focus of these investment vehicles relates to companies at various stages of corporate development. A successful exit from these types of investments requires more resources and professional advice. 

The New Civil Code 

The New Civil Code introduced several substantial changes to Hungarian corporate law, including to the corporate form and investment vehicles of public limited companies. Pursuant to the New Civil Code, public limited companies are statutorily required to trade their shares (common stocks) on a stock exchange, while the shares of a private company limited by shares may not be traded on any stock exchange.

As a substantial change, the New Civil Code stipulates an express ban on collecting registered share capital on the basis of a public invitation in the course of the establishment procedure of a public limited company. Based on this, it seems that it is not possible to initially establish a public limited company, i.e. it is not possible to collect the obligatory minimum amount of the registered capital by means of a public subscription procedure, as this would necessarily involve at some stage a public invitation of investors (shareholders). According to the official commentary on the New Civil Code, the primary reason to introduce this limitation was to protect the public interest from the risks of investing into companies without any actual business operation.

One may propose a two-step procedure as a solution: to establish a private company limited by shares, which, after the completion of certain corporate restructurings, may be admitted to trading on a stock exchange and by the means of this fact converted into a public limited company.

By Dusan Lasztity, Partner, and Adam Boross, Associate, Kajtar Takacs Hegymegi-Barakonyi Baker & McKenzie

This Article was originally published in Issue 6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Equity 

In the first three quarters in 2014, the Austrian Traded Index (ATX) has shown a negative price performance (-14%), in contrast to other holistic European indices (e.g. Euro Stoxx: +2%). The Vienna Stock Exchange thus continues to display an independent trend, which is mainly caused by the Ukraine/Russia crisis, but partly also attributable to corporate earnings declining on average. As the Viennese market is a rather small peripheral market in terms of liquidity, it tends to be more strongly affected to the upside by positive developments, but conversely also reacts more strongly to the downside due to negative ones, as currently. CEE continues to be a dominant issue for the stock market. The leading ATX companies are either global niche players or those that generate considerable earnings in the CEE region. Because of its proximity, the Ukraine/Russia conflict tends to be interpreted negatively; however, it seems that international investors over-estimate these effects on Austrian companies.  

Austrian companies (e.g., Raiffeisen Bank International, PORR AG, FACC AG, BKS Bank AG, and Telekom Austria AG) have raised roughly EUR 4.1 billion this year through the stock market – more than the past two years combined. The large volume of fresh equity raised shows both the capacity of the Austrian capital market for new listings and significantly stimulated investor interest. The largest capital increases this year were carried out by Raiffeisen Bank International (EUR 2.78 billion) and Telekom Austria AG (EUR 997 million). FACC AG, the shares of which started trading on the Vienna Stock Exchange in June (and which was advised by Wolf Theiss), marks the first IPO in Austria since 2011. This leading global manufacturer of lightweight components for the aviation industry raised approximately EUR 213 million in its initial public offering, assuming full exercise of the greenshoe option. EUR 150 million in fresh capital came from a capital increase. 

Debt

With 33 new listings/inclusions of corporate bonds on the Vienna Stock Exchange in 2014 (as of November 21, 2014), representing an aggregate amount of approximately EUR 5.643 billion (EUR 3.568 billion from Austrian issuers and EUR 2.075 billion from foreign issuers) the Vienna Stock Exchange reached a record volume in new issues of corporate bonds in 2014.

The end of 2014 brought additional benchmark issues of corporate bonds, such as the EUR 1 billion 1% notes due 2024 issued by OOB-Infrastruktur Aktiengesellschaft, the EUR 500 million 1.5% notes due 2024 issued by VERBUND AG, and the EUR 750 million 0.6% notes due 2018 issued by OMV AG. (Wolf Theiss was involved in all these issues). 

Trends (SME Initiatives)

In times of stricter capitalization requirements for banks (Basel III) it might be harder for some companies to obtain traditional bank financing. Accordingly, we expect more companies to turn to the capital markets or alternative financing sources in order to meet their financing needs. Whereas for Austria’s large corporates, bonds have been an established tool in the finance matrix for decades, only a few small and medium corporates (SMEs) found their way to the exchange. For SMEs the cost, personnel, and legal requirements of capital market transactions seemed to be a burden. In particular, the usual lower volumes of SME bond issues make the costs – which are to a certain extent independent from the transaction size – a higher percentage of the volume. 

Recently, we have seen financial intermediaries try to cope with these obstacles by providing lean transaction structures to promote cost efficiency. Furthermore, the Austria Wirtschaftsservice Gesellschaft mbH recently established new grant funding for the costs of capital market prospectuses for bonds with a maximum aggregate amount of EUR 5 million (up to 50% of the costs for the preparation of the prospectus, with the subsidy limited to a maximum of EUR 50,000). The European legislature, focusing on the finance needs of SMEs, has also introduced regulatory benefits for SMEs on the capital market, such as lower disclosure requirements under the Prospectus Regulation and the publication of ad-hoc notices on the website of the stock exchange instead of the issuer’s website. The above-mentioned measures may lead to increased activities of SMEs on the capital markets.

By Claus Schneider, Partner, and Alexander Haas, Counsel, Wolf Theiss Austria

This Article was originally published in Issue 6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Albanian Parliament has approved an amendment to Law 8537/1999 “On Securing Charges” and approved a new law, Law 133/2013 “On Payment System”, which is fully harmonized with European Directives 98/26/EC of the European Parliament and of the Council of May 19, 1998 “On Settlement Finality in Payment and Securities Settlement Systems” and 2002/47/EC of the European Parliament and of the Council of June 6, 2002 “On Financial Collateral Arrangements.” 

The Albanian Parliament has approved an amendment to Law 8537/1999 “On Securing Charges” and approved a new law, Law 133/2013 “On Payment System”, which is fully harmonized with European Directives 98/26/EC of the European Parliament and of the Council of May 19, 1998 “On Settlement Finality in Payment and Securities Settlement Systems” and 2002/47/EC of the European Parliament and of the Council of June 6, 2002 “On Financial Collateral Arrangements.”

By virtue of the amendment, “cash” and “financial instruments” are excluded from the scope of application of On Securing Charges, and the new Law On Payment System introduces financial collateral as a new form of securing financial obligations (alongside mortgage, pledges, and securing charges). For the purposes of the Law On Payment System, financial collateral consists of “cash” and “financial instruments,” with the latter including the shares and bonds of  commercial companies, treasury bills and bonds issued by the Albanian government, securities issued by the Bank of Albania, and shares or quotas of investment funds and other financial instruments that are comparable to shares and bonds approved as such by the Albanian Financial Supervision Authority.

By virtue of the Law On Payment System only legal entities may enter into financial collateral agreements, and at least one of the parties must be, inter alia, the Republic of Albania, a financial institution (the Bank of Albania, a central foreign bank, a bank, or a foreign financial institution similar to a bank), or a national or international public authority. Therefore, natural persons and individuals are not entitled to enter into these kinds of agreements or to provide financial instruments for securing an obligation. 

For validity purposes and in order to be enforced, an agreement on financial collateral must be in writing, and possession of the financial collateral should be transferred to the beneficiary (collateral taker). 

Where the financial collateral consists of cash, the transfer of possession must be made by transferring the cash to a specific account in order that the beneficiary (the collateral taker) possesses or exercises control over it. Where the financial collateral consists of financial instruments (e.g. shares or obligations or other negotiable instruments in the capital market), the transfer of possession cannot take place by means of a physical possession, of course, since the latter are in a dematerialized form evidenced by a book-entry. In the absence of a central registry for all types of financial instruments, the financial collateral in the form of financial instruments is perfected through registration in appropriate registries. So, for instance, the financial collateral in the form of shares is perfected through registration with the Shares Registration Registry held by the Shares Registration Center, while government securities (obligations, treasury bonds etc.) are perfected through registration with duly licensed banks by the record holder of the securities. 

The Law On Payment System intends to facilitate the enforcing process of financial collateral by stipulating that in case of failure to comply with financial obligations the financial collateral may be enforced immediately without any enforcement order issued by the court.

Where the financial collateral consists of cash, the enforcement process is easy, as the beneficiary (the collateral taker) may immediately take possession and obtain the cash. Where the financial collateral consists of financial instruments, however, enforcement is carried out by means of sale or acquisition, with the obtained amount subsequently used for the fulfillment of the secured obligations. 

In relation to the enforcement of financial collateral the new Law On Payment System intends to create a new order of priority by stipulating that in cases involving financial collateral the beneficiary (the collateral taker) has priority over other creditors. However, the enforcement order of priority is regulated by the Albanian Civil Code, and considering the hierarchy of the laws, the provisions of the Civil Code prevail. Therefore, the provisions of the Law On Payment System regarding the order of priority may in fact not be applicable.

Finally, even though the aim of the new law is harmonization with European legislation in order to facilitate the enforcement of financial collateral by creating a new form of pledge, certain aspects of the law remain inefficient. 

By Evis Jani, Partner, and Erinda Abdyli, Senior Associate, Gjika & Associates

This Article was originally published in Issue 6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Christoph Moser is a Partner with Weber & Co specializing in corporate finance, capital markets law, banking law, corporate law, and M&A. Prior to joining his current firm, Moser worked for Baker & McKenzie, Schoenherr, CMS, and Styria Borse Express.  

The Capital Market In Austria

According to Christoph Moser, Partner at Weber & Co., when looked at from a general perspective the Austrian Capital Market tends to be weaker than that of Western European countries. In a conversation with CEE Legal Matters he pointed out out that while the Austrian Market faired considerably better  in recent years than most CEE countries, a strong point of comparison for Vienna has always been the German Capital Market. The latter, Moser explained, “has registered considerable growth in recent years, a trend that, sadly, has not been followed by Vienna, especially on the ECM front where the general feeling is that we are in a weak phase these days.” To illustrate, he pointed out that the one successful IPO in 2014 currently trades below its IPO price, while another planned IPO was aborted. “On the IPO front, the 2013/2014 period was weak with most potential players still waiting for the one large successful IPO to act as an icebreaker,” Moser said. “Unfortunately, it never came.”  

In terms of prospects for the upcoming years, he said, there are “rumors circulating in the market” with regards to one potential high volume transaction in financial services and another revolving around an industrial company. Forced to speculate about which is more likely to come to fruition, he reluctantly pointed to the financial services one, but he emphasized that, at the moment, both are just rumors. 

No One is Paying Premiums

When asked if he thinks that the lack of movement on the IPO front is caused more by economic conditions or by regulatory blocks, Moser suggested that the former was more to blame, but also highlighted the market structure as a potential obstacle. Specifically, he explained, many non-listed Austrian companies, including large players, are still family-owned or in the hands of private foundations. These types of agents tend only to take an IPO route if there is a prospect for good pricing. In light of a number of projects being dropped due to pricing, Moser reported, the optimism of the market simply isn’t there. 

This market structure also adds to the effect of new regulations. Moser explained. “Yes, there are some stricter rules in place for a few years now, and any company that is planning an IPO needs to know what this entails, including in terms of corporate governance and disclosure. With family-owned companies this requires a considerable adjustment both in terms of organizational culture and in terms of rebuilding their governance structure to match the public market’s and regulators’ expectations.” He  emphasized that this is “a minor point relative to the valuation that has been awarded in previous years, but it definitely does not help.” 

At the end of the day, according to the Weber & Co. Partner, the market and investors simply do not pay the premiums that they used to in the past, and without this, it is unlikely that we will see a lot of large IPOs in the near future. “The one hope is in niche players that are really ambitious and want to take their company public, but, overall, there are not many big ticket IPOs on my personal radar for 2015.”

Where Are the Capital Holders?

According to Moser, the main investors in the Austrian market 4-5 years ago were from the US. Even further back, starting in 2002-2003 in particular, the market saw a lot of investors turning towards Austria as the gateway into the rest of CEE. “Many such investors felt that, because of the country’s positioning, they would get CEE exposure if they invest in Austria,” he said. “Unfortunately, the CEE fantasy has dried up for some years now and the market is mainly driven by continental European and some US and Asian investors.”

As the Polish market did, the Austrian market enjoyed a flux of capital from pension funds a few years ago, but this too is no longer the case. Moser said that while there still is a strong pension-fund basis available in the market, it is not an overly active one – “definitely not like the ones we hear about in Norway or New Zealand for sure.” Indeed, the only notable recent example of a pension fund investing in the market that he could point to was an Australian fund intending to invest in a minority stake in Flughafen Wien AG, the Viennese airport, but Moser believes that is a one-off example rather than a trend. 

What’s The Stopgap?

Since there are no big-ticket IPOs “just waiting to happen,” what’s keeping the firm and the market busy while everyone is waiting for that ice-breaker? According to Moser, while IPOs have yet to pan out in the market, “the situation with rights issues is quite different, with very large and very successful transactions taking place in the past years, primarily driven by financial institutions.” He pointed to two transactions of Uniqa Insurance Group in 2012 and 2013 with high volumes, including a so-called re-IPO, and a large rights issue by Raiffeisen Bank International. 

“Re-IPOs are a growing trend in the case of companies with one or two major shareholders and a low free-float. In such instances, a rights issue is combined with a notable secondary placement of shares from the major shareholders,” Moser explained. According to him, they are primarily interesting if the shares of the companies are traded with low volumes and the free flow is small. In such case, a successful re-IPO may expose the stock to totally different investors. Moser was optimistic about this growing trend, stating that “if rights issues continue to come up in the next months as a growing trend, despite our relatively small size, as an experienced corporate finance law firm we’re a notable market player and hopefully will play a role in them.”

On top of that, the Weber & Co. Partner explained that DCM is one of their core practices, as well as securitizations – but “really, just like everyone else, we are all waiting for the next big equity deal.”

Status of DCM in Vienna

According to Moser, 2012 to 2014 saw a lot of new bonds being issued, driven by low interest rates with “many companies managing their debts via bond issues as they expected interest rates to rise soon, which not yet happened.” Since most bond issuers have, by now, collected the funds they needed, a slow down can be expected – but in terms of volume, Vienna is likely to register one of its strongest years as a result of Italian companies listing bonds in the market due to a regulatory loop-hole (see Buzz Section – Austria – Issue 1.5.), which really is more of an anomaly than the norm. In terms of what Moser refers to as “the real market,” he believes there should still be a steady deal flow with a considerable amount of bonds reaching their 4-5 year maturities and being subject to refinancing, which will likely lead to recurring transactions – at least as long as interests rates remain low. 

A likely-to-increase set of transactions identified by Moser is in the secured bond market. The reason for this, he said, is that in a market where investors show almost no risk appetite, these (mortgage-) secured bonds, if sold in a conservative manner, tend to be perceived as a very safe and – as a result –  popular investment, especially by pension funds and insurance companies. Moser explained that this was especially true for the latter in light of increasingly stricter rules on insurance companies in terms of their investments. 

But Moser warned that “secured bonds might not always be as secured as they are advertised.” He explained that some issuers try to market secured bonds with coupons of 7-8% (compared to other secured bonds’ interest rates of 2.5-3.5%). The reason for the discrepancy is that many of these higher interest bonds are not directly secured or relate to real estate project developments, a situation which presents certain risks. According to Moser, it comes down to a “marketing question,” and it is up to the intermediaries to ensure full disclosure, rather than simply “portraying it as a safe harbor investment.”

Gazing Through the Regulatory Chrystal Ball

In terms of legislation, according to Moser, the market will continue following EU developments, especially in the banking and financial sector, where Austrian banks will of course face stricter capital requirements. Recently, Austria implemented the Alternative Investment Fund Managers Directive, which “has closed a lot of gaps in the unregulated funds scene but, as always, there are still problems related to implementing a European directive across various member states, which can become a problem in cross-border transactions.” For example, one country – like Austria – may qualify an entity as an alternative investments fund, while the same entity may be expressly exempted from the AIFMD regime by another. It then becomes difficult to market such offers across different jurisdictions. 

At the same time, the new Market Abuse regime will come into force in 2015. According to Moser, penal provisions in cases of market abuses will be introduced. This will likely affect the manner in which people act in a market where “it sometimes used to be treated as a gentleman’s game of ‘if I am caught’ – pretty much like tax evasion.”

All of the above considered, Moser’s outlook on his firm’s position in the market is optimistic. He concluded, “We have built up a small but strong team and our unique selling point – our strong track record as well as in particular our involvement in 70-80% of the transactions on the underwriters’ side – will likely keep us busy in the upcoming period.”

This Article was originally published in Issue 6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

On November 20, Partners from six of the leading Capital Markets practices in Poland met in White & Case’s Warsaw Office for a CEE Legal Matters Round Table on Capital Markets in the country. Moderated by the CEELM Editors, the Round Table included participants from both international firms and firms operating exclusively in the Polish market. Participants included (co-host) Piotr Szelenbaum (White & Case Partner), Piotr Lesinski (Allen & Overy Partner), Konrad Konarski (Baker & McKenzie Partner and Head of the firm’s Securities Practice Group), Ludomir Biedecki (DJBW Partner), Krzysztof Haladyj (Eversheds Partner and Head of the firm’s Banking and Finance and Capital Markets teams), Jacek Jonak (Jonak Founder and Partner), and Pawel Wajda (White & Case Counsel).

The conversation started off with a discussion about the current state of Polish Capital Markets and whether the Warsaw Stock Exchange still holds its position as the “Tiger of CEE Equity Capital Markets.” Szelenbaum provided a 20,000-mile perspective: “It is still alive, and despite forecasts, it will last.” He referred to the “dynamic development of the capital markets in recent years, especially in terms of high yield,” but noted that “there has been a shift in the last two years.” 

According to Szelenbaum, upcoming trends are likely to revolve around increased regulation of the market and “more and more interactions with the regulator brought on by new legislation, such as the recently amended Transparency Directive due to be implemented in the Polish system by the end of the year, which will impose much harsher sanctions on board issues.” Naturally, he pointed out, this will translate into more work for lawyers. 

Lesinki added: “The equity capital market [ECM] is pretty much dormant at this point. On the other hand, while the debt capital market [DCM] is not booming per se, it is definitely developing quickly. At the moment, what the market registers is a lot of transactions in DCM, a situation that is reversed from a few years ago.”

Why the Slowdown in Polish ECM?

To explain the rise in DCM and slowdown in ECM, Lesinki pointed towards the demise of the classic banking climate correlated with the recent reform on pension funds in Poland leading to less capital and, implicitly, less “investment appetite for ECM.” Konarski explained that in December 2013, the Polish parliament passed a bill to reform the private pension fund sector in Poland, which greatly decreased available capital for investments in the Warsaw Stock Exchange. The bill required open pension funds, which collectively had been the largest private investor on the Warsaw Stock Exchange, to transfer a large part of their assets – primarily in treasury bonds and treasury bills (worth around PLN 127 billion) – to the state’s Social Security Institution.

Jonak confirmed that a lack of institutional demand seems to plague the ECM market. He noted: “The changes since spring have made the usual pattern of selling equity offerings unusable. In the past, it would be enough to make an offering and have one or two big private pension funds to buy into it to lead to a snowball effect with the others following suit. There is now a need to learn a new pattern and it has proved to be easier said than done to learn the skills needed in the new market conditions.“ 

Jonak also noted that, while the number of successful listings has decreased, the market is registering movement, with the climate for M&A being generally good. Szelenbaum agreed that the climate is indeed good in terms of stock transactions on the stock exchange, especially in terms of large groups in Poland. This also reminded him of another reason why the market has slowed down in recent years, as he explained that: “the era of large privatizations-driven IPOs has gone with only a few assets in energy remaining available in the pipeline.”

And there is another risk on the horizon for the Polish market. Specifically, according to Haladyj, starting next year, pension funds will be allowed to also invest abroad (which they were prevented from doing until now), meaning they will be even more flexible in terms of investments, putting the local market at risk.

At the end of the day, Szelenbaum pointed out, the “health of ECM is always connected to the economy as a whole.” And while the Polish economy took less of a hit than most CEE countries, it is still sluggish relative to past growth. As a result, the slowdown in ECM, Szelenbaum believes, is natural.

WSE’s Position in CEE

Regulations on intermediaries (brokers) have doubled in the last 18 months, according to Jonak, partly as a result of EU-driven legislative updates, and partly based on changes to local legislation making the “life of the simple broker considerably more difficult.” 

Although many other markets are registering similar challenges (e.g., Budapest, Vienna and Prague), Jonak reported an outflow of capital that would previously have gone to the Warsaw Stock Exchange, with Romania being a common destination. Szelenbaum expressed a feeling that the WSE has “lost some of its gravitas.” While, in the past there were talks of Warsaw becoming a regional hub, the White & Case Partner said he was not sure if the same vision remains. On the other hand, Jonak pointed out, “while the traditional equity model is simply not working, with many companies not going public due to no perceived benefit, the debt side is generally ok, with today’s model coming into its senses.” 

Lesinki believed that “the market has not necessarily lost its gravitas – rather, it is not growing as quickly as we would like,” and he said that he expects that, “with current trends, the market will pick up again.” He also pointed out that the WSE is still a go-to place for a dual issuance/listings, a point seconded by Szelenbaum. 

Konarski pointed out that the Warsaw market had been successful in the past because of several factors: (1) the privatization program, which was carried out through the stock exchange, (2) pension fund capital acting as fuel for the market, and (3) limitations on the ability of pension funds to invest abroad. “Unfortunately, all three components are gone now, and it is, for now, unclear what will replace them as the engine for continued growth.” Lesinki agreed that the pension funds contributed greatly to the WSE’s growth and pointed out that the main question now is “whether the market is mature enough to continue growing without them.” Haladyj did mention that alternatives exist and that there are other capital holders “who might step up on the long run,” but that they will likely not be able to replace the funds fully.

Main Industries to Look Out For?

When we asked what the primary industries are that firms expect work to come from in the upcoming period, Biedecki pointed out that it can be really difficult to predict: “In the last 12 months we’ve seen work coming from banking, chemicals, pharmaceuticals, and others. It is difficult to pick one specific sector that will drive M&A-driven capital markets work.” Jonak agreed but said that, if he really had to pick one, he’d probably bet on energy. With similar caveats, Szelenbaum pointed towards real estate as a growing market in Poland with large players that might potentially be interested in ECM in the future. Ultimately, Konarski pointed out, he didn’t much care one way or the other where the work comes from, “since, as far as capital markets go, the work is pretty much the same.”

Law Firms’ Pipeline and CM Team Growth?

When we asked how their current and projected pipeline will affect their teams, Szelenbaum laughed that “this is the part where we take turns in reporting that we are all growing.” Turning serious, he explained that the trend he expects to see across the board is for firms to keep current head-counts but likely discourage over-specialization, due to the fluidity of the work. Along the same lines, Lesinki pointed out that a great deal of the lawyers who used to work in ECM now focus on DCM. Jonak explained the ease of transition by drawing a comparison between Warsaw and the “huge CM centers such as New York.” He elaborated: “In a huge CM market, a lawyer needs to work for 5 years in a heavily specialized function to be able to fluently speak with the banks there, but in a smaller market it is only natural to be exposed to all relevant areas of CM. This makes the transition from one specialization to another, based on market needs, a lot easier.” The same distinction was made by Konarski, who explained that: “while in London during this kind of transition you’d probably have to lay off entire teams, in our market, due to the general CM exposure of our lawyers, we are able simply to refocus the team.” At the end of the day, this transition is better for law firms able to adapt. Jonak explained that “debt-focused work is far more complex and promises more work.”

Haladyj also pointed out that there is still work to be carried out in ECM with some (primarily niche) players – for example in the tech sector – still exploring IPO opportunities. He also pointed out that another niche that is developing is asset-based securities, for which there is a “growing appetite in the market, especially from those based on mortgage loan portfolios.”

Another growth factor for firm work is the growth of formerly-privatized Polish companies like PKN Orlen, according to Szelenbaum, which have grown to a point that they are beginning to look towards expanding abroad, meaning they will require support – or, coming from the opposite direction, foreign companies such as CEZ of Prague beginning to look towards the Polish market who will need local legal advice. Biedecki concurred: “Poland used to be more inbound but has been growing its outbound perspective, especially in the mid-market, which opens up a lot of opportunities for lawyers.”

Furthermore, hearkening back to Szelenbaum’s point at the very beginning of the conversation, Biedecki explained that the expected increase in regulations on capital markets in Poland will also affect the amount of work on lawyers’ plates. On the other hand, Lesinski said that, after exploring this increased regulation with his team for several years, they have reached the conclusion that the “there will be big upcoming regulations leading to more work” expectation has been a recurring theme for long time. “The trend that we identified,” he explained, “is that companies tend to deal with this through their own in-house compliance teams.” However, according to Szelenbaum, the increased liability brought by the new regulations “from EUR 2 to 40 million in some instances” might raise doubts in the minds of the company boards as to whether their in-house teams are able to take on such liability without a firm’s assistance. 

At the end of the day, while the nature of the market is changing, the general consensus of round table participants was one of optimism as they all expressed the capability and flexibility needed to cope with an ever-evolving market. 

This Article was originally published in Issue 6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

For many Poles, 2014 will be remembered as the year of a landmark victory over world champion Germany in the Euro 2016 football qualifiers. Some other Poles will recall the national team winning the World Championship in volleyball back in August. However, 2014 is also the 25th anniversary of the historic elections of 1989, which led to the fall of communism, and the 10th anniversary of Poland’s accession to the EU. A good moment to wrap up.

10 Years in the EU

In August 2014 Polish Prime Minister Donald Tusk was unanimously elected as the president of the European Council, after 7 years at the helm of the Polish government. After 10 years in the EU, Poland is no longer a “new member state,” but an active player within the community. Tusk’s new role lends credence to the country’s increasing involvement in shaping the EU policy.

It would be difficult to deny that the country hugely benefited from the accession, with EU funds and access to the common market only the beginning. The membership also triggered new developments in infrastructure and an increase of investment in human capital. A number of domestic and foreign investors benefited from EU support.

At the same time, the country featured a stable political environment. The centric Civic Platform party won the elections back in 2007, then again in 2011, and continues to govern the country today with its coalition partner, the Polish People’s Party. This represents the first time in Poland – after 1989 – that a governing party has been re-elected for a consecutive term.

Nobody’s Perfect

Every country has its own challenges, and Poland is obviously not an exception. For instance, the tax system should be more predictable, and focus on criteria other than price would be beneficial in public procurement processes. Keeping public spending under control and looking carefully at the pension system and at large subsidized groups (farmers, for example) are other challenges.

It is true that Poland did not technically fall into recession, but the country did face a downturn in 2008-2009. Poland is obviously not immune to developments in other countries, and if the external environment continues to deteriorate, it will be a challenge to keep the Polish economy growing. The situation in Ukraine and the sanctions imposed on Russia have already impacted the economy.

So indeed there are things to be done internally, and we should hope that the external environment will not have a too-substantial negative influence. At the same time, it is important to put things into perspective.

1989 and 2013

Back in 1989 Poland’s GDP (USD 82.2 billion) was approximately on the same level as Ukraine’s (USD 82.7 billion). If we compare gross domestic product at purchasing-power parity per capita, then the difference is striking. In 1991, Poland was significantly below Ukraine (USD 5,510 vs. USD 6,560).

Not surprisingly the numbers for 2013 are completely different – this time in favor of Poland. What happened after Poland joined the EU is self-evident: from 2004 to 2013 Poland’s GDP more than doubled, from USD 252.8 billion to USD 517.5 billion.

Comparing numbers is sometimes a revealing exercise and helps put things into perspective, not least to those who claim that more could have been achieved.

Local Environment, Global Challenges

Putting things into perspective applies to the legal services sector as well. If we look at developments in other European countries and other parts of the world, there are numerous similarities.

In its recent report 2014 Chief Legal Officer Survey, the US advisory firm Altman Weil asked general counsel about issues of importance in managing their corporate law departments. What should law firms expect, according to this survey? Pressure on fees, price reductions from outside counsel, alternative or fixed fee solutions, changing the service delivery model to provide greater value to clients.

This does not essentially differ from what one may see on the Polish or CEE market. Some may see these changing expectations as a problem. However, they represent an opportunity for those who are eager to adapt and innovate. 

Poland: Spring Into New

Poland’s new logotype was the last project of famous brand expert Wally Olins. It is a spring in the country’s shape. As the authors explain, it symbolizes the character of the Poles, their latent energy and wayward – but at the same time constructive – approach to the world.

If Poland wants to spring into the new and encourage others to join, this will not happen automatically and will require more effort. And this applies no matter whether we are talking about law, politics, economy, or sports. 

By Mariusz Kowalski, Partner and Chief Marketing Officer at Magnusson

This Article was originally published in Issue 6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.