OTC Market Dearth Means PZU Shuns Corporate Bonds: Poland Credit

Investors should shun zloty-denominated debt sold by Polish companies because an undeveloped secondary market hampers liquidity and skews pricing, according to the country’s biggest mutual fund.

The trading volume of corporate bonds both on the Catalyst market, set up in 2009 by the Warsaw Stock Exchange, and directly between banks and funds was 1.77 billion zloty ($565 million) in the first quarter, or 3.4 percent of the total outstanding company debt, according to the bourse and Fitch Ratings. Polish corporate securities returned 23 percent in the past year in dollar terms, the most after Venezuela among 37 emerging markets, according to JPMorgan Chase & Co. indexes.

Trading of corporate bonds in the so-called over-the-counter market is hindered by lenders holding the notes to maturity. Central bank Governor Marek Belka said last week he wanted to boost the market by making more debt usable as collateral. Polish company bonds stood at 6.7 percent of gross domestic product, compared with as much as 300 percent in western Europe, as bank loans dominate, Warsaw bourse data show.

“We recommend avoiding zloty corporate bonds until there’s a market that ensures liquidity and fair valuations,” Tomasz Stadnik, who oversees the equivalent of $5.4 billion as chief investment officer at PZU TFI SA, Poland’s largest mutual fund, said in an April 11 interview in Warsaw. The lack of development of trading in the secondary market and the inability to bundle debt for resale makes it difficult to value securities, he said.

Debt Sales

Domestic companies sold 2.89 billion zloty of notes in the first quarter, increasing the total debt outstanding to 52.2 billion zloty, according to Fitch. That compares with a 1 billion zloty increase in bank loans to companies in the first two months bringing the total to 273.3 billion zloty at the end of February, according to Poland’s financial market regulator.

Banks have a lot of cash and are attracting the best borrowers for their loans, according to Tomasz Puzyrewicz, head of debt capital markets at Bank Zachodni WBK SA.

“There are also a lot of good companies that choose bank loans because of the longer maturities they can get,” he said by phone yesterday.

Broadening Collateral

The Polish central bank will be “proactive” in broadening collateral at its cash operations, Belka said on April 10. It currently lends cash to banks in exchange for securities issued by the central government and some municipalities, road bonds sold by state-owned lender Bank Gospodarstwa Krajowego as well as some mortgage-backed assets, according to its website. No corporate notes are presently used as collateral, the bank said.

Companies sold a record 24.9 billion zloty of bonds last year as utilities from Poland’s dominant gas distributor Polskie Gornictwo Gazowe i Gazownictwo SA to Energa SA, the country’s fourth-largest power group, diversified financing to upgrade aging facilities.

Poland’s second-largest power utility Tauron Polska Energia SA, rated at BBB by Fitch, the second-lowest investment grade, may sell 1.5 billion zloty of bonds this year while PKN Orlen SA, the country’s biggest oil refiner, plans to offer as much as 1 billion zloty of debt within 12 months.

“For securities with investment-rating potential liquidity is quite good and there rather shouldn’t be any problems with exiting,” Marek Marciniak, a Warsaw-based senior debt market analyst at ING PTE SA, the nation’s largest pension fund, with the equivalent of $20 billion in assets, said by phone yesterday. “Last year saw a handful of new, big issuances with investment grade, which improved liquidity.”

Market Makers

Marciniak, whose fund almost doubled its corporate debt portfolio to 2.78 billion zloty in March from a year earlier, said ING requires the bonds it’s buying to have market makers that ensure trading on Catalyst.

The extra yield investors demand to hold Polish dollar-denominated bonds rather than U.S. Treasuries was unchanged at 128 at 12:30 p.m. in Warsaw, indexes compiled by JPMorgan Chase & Co. show. The additional yield on 10-year zloty notes over German bunds declined two basis points, or 0.02 percentage point, to 225, data compiled by Bloomberg show.

The zloty strengthened less than 0.1 percent to 4.1091 against the euro, reducing this year’s decline to 0.7 percent.

Default Risk

The cost to protect Polish debt against non-payment for five years using credit-default swaps fell one basis point to 81, data compiled by Bloomberg show. The contracts, which decline as the perception of creditworthiness improves, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower renege.

The absence of entities to buy so-called distressed assets and a bankruptcy law that makes is difficult to recover losses is hurting development of the bond market, according to Marcin Zoltek, who oversees an equivalent of $19 billion of assets as chief investment officer at Aviva PTE SA, Poland’s second-biggest pension fund, said in an interview on March 11.

----With assistance from Konrad Krasuski in Warsaw. Editors: Stephen Kirkland, Wojciech Moskwa, Peter Branton