Poland Risks Return to Middle Ages in Corporate Bond Rule Revamp

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New laws intended to boost trading in Polish corporate bonds risk hindering the market instead.

Bondholders may face higher transaction costs and a lengthier sale process in the event of a default, according to Warsaw-based money managers PTE Allianz Polska SA and Credit Value Investments Sp. z o.o. The law, which comes into force July 1, prevents electronic trading in the period after a bondholder has the right to receive the final payment.

“This could push us back to the Middle Ages,” Michal Ferenc, who helps oversee the equivalent of $571 million in corporate debt as a money manager at Credit Value, said by phone Wednesday. “We will all need to store the paper bonds in a safe. This is not what we had hoped for.”

Any impediment to trading threatens to further marginalize the bond market’s role as an alternative to bank loans for companies. While Poland’s economy is 64 percent the size of Turkey’s, its local corporate bond-market sales this year are 50 percent lower.

The new rules will help ensure final bond payments go to the holders entitled to receive the money, clear up tax issues and introduce new categories of debt such as perpetual and subordinated bonds, according to the Finance Ministry. They also go against a global trend of reducing barriers to trading by moving to paperless, de-materialized bonds and shares.

‘Few Laggards’

“There are a few laggards here and there, but the idea of owning physical paper is no longer feasible,” Charles Geisst, a professor of finance and economics at Manhattan College in New York, said by phone on Wednesday. “It causes more trouble for investors who do hold it.”

Poland’s corporate bond market already faces an uphill battle attracting borrowers, with companies using bank loans for 85 percent of their funding, according to data from Poland’s financial market supervisor and Fitch Ratings. Trading in the secondary market is further limited by investors who prefer to buy and hold notes to maturity.

While the legislation won’t necessarily lead to higher borrowing costs for issuers, it could weaken the distressed debt market, according Credit Value’s Ferenc, who also holds the securities. “The price of a defaulted bond could possibly fall to 10 cents to 15 cents on the dollar from about 30 cents now,” he said.

Agata Jankowska-Galinska, an attorney at Deloitte Legal in Warsaw, also predicts deeper losses than in the current system. “It seems that a bondholder won’t be able to sell the bond even at a fraction of its value,” she said by e-mail on Wednesday.

Limited Market

For now, the size of Poland’s bond market means there won’t be a major impact from the new rules, according to Kamil Witkowski, head of corporate bond trading at FM Bank PBP SA in Warsaw.

“The number of investors interested in the most risky bonds is very limited,” Witkowski said by phone on Wednesday. “If there’s demand for this kind of debt, the market will find a way to trade it. The market has shown it can be creative.”

Poland’s corporate bonds have returned 1.9 percent this year, compared with a 1.8 percent loss on government notes, according to MBank SA’s index of company debt and data compiled by Bloomberg.

Daniel Thieke, managing director at Depository Trust & Clearing Corp., which processes securities trades in the U.S., said on Wednesday that “maintaining and safekeeping physical certificate documents could become costly and could introduce a new level of risk.”

‘Forever’ Holder

The change in the Polish law “doesn’t help develop the local market where liquidity isn’t big anyway,” according to Rafal Trzop, deputy chief investment officer at PTE Allianz, a Polish pension fund and a unit of Europe’s biggest insurer.

“If default occurs, an investor will be left with a bond for longer or even forever,” he said by phone on June 17. “A return to paper-form would be like going back in time and this isn’t what we have fought for.”

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