Oaktree Says Banks Stifling Corporate Bond Market: Poland Credit

Polish banks and pension funds are keeping borrowing costs elevated for companies by holding their debt to maturity and stifling the development of the corporate bond market, Oaktree Capital Management LLC said.

Zloty-denominated loans to companies have an average interest rate of 6 percent, according to central bank data. That compares with a yield of 2.99 percent on JPMorgan Chase & Co.’s index of Polish government bonds in zloty. Trading volumes on Warsaw’s Catalyst corporate bond market amount to 5.8 million zloty ($1.8 million) a day, or 0.5 percent of the stock market, not enough to get reliable prices for most companies.

“There are very few opportunities to buy debt in Poland,” Karim Khairallah, a London-based managing director at Oaktree, which oversees $26 billion of corporate debt worldwide, said by phone on May 20. “Poland needs to broaden its investor base for corporate bonds from dominant banks and pension funds.”

Companies in the European Union’s biggest eastern economy are turning to debt as capital requirements for banks limit loan growth. While swelling to a record, sales of local-currency bonds amounted to less than 10 percent of their counterparts in Poland’s emerging-market peers Turkey and Russia.

Preferring Stocks

Dollar-denominated securities sold by Polish companies returned 27 percent over the past year, the most among the 37 emerging-market indexes compiled by JPMorgan. Zloty-bond performance is hard to measure as the debt trades infrequently.

Polish companies offered the equivalent of $1.1 billion in local-currency bonds since the start of this year, 9 percent of the amount sold in Turkey and 5 percent of Russia’s total, data compiled by Bloomberg show. Equity sales in Poland raised 15.4 billion zloty this year, almost three times more than those in Russia and nine times more than in Turkey, the figures show.

Excluding banks, Polish companies sold a record 12.8 billion zloty of debt in 2012, boosting the total outstanding by 31 percent to a record 31.4 billion zloty in December, according to Fitch Ratings data. That compares with 270.4 billion zloty of corporate loans on April 30, the latest central bank data show.

Multimedia Polska SA sold 1.04 billion zloty of seven-year notes on May 10 in the biggest issue ever by a private Polish company in local currency. Banks bought 46 percent of the bonds, while pension and mutual funds purchased 45 percent, Chief Executive Officer Andrzej Rogowski said by phone on May 14.

Needing Change

“The lack of secondary market means that buyers of corporate debt in fact are giving loans to sellers,” Piotr Nowak, Warsaw-based deputy head of fixed income at PKO TFI SA, which has 11.4 billion zloty under management, said by e-mail on May 17. “Lack of vivid secondary market means that companies need to agree to higher spreads when they are selling debt.”

To spur growth in the corporate bond market, the government last month proposed regulations to strengthen bondholder rights while the central bank announced plans to relax collateral rules for company notes at its repo transactions.

Poland’s central bank will be “proactive” in broadening collateral at its cash operations to include more corporate securities, Governor Marek Belka said in Warsaw on April 10. The European Central Bank has been accepting corporate bonds as collateral in its refinancing operations since before the credit crunch in 2008, as long as they have an investment grade.

More Say

The government last month approved recommendations to give more legal heft to bondholders, who under the proposed legislation would have a say in any significant changes of issuance conditions or larger investment plans by the issuer.

Poland needs a “clearer” regulatory environment “to give bondholders comfort that their investments are protected,” Khairallah at Oaktree said in the interview.

Catalyst, Warsaw Stock Exchange’s trading platform for corporate bonds, lists notes from PKO Bank Polski SA, Poland’s biggest lender, and PKN Orlen SA, the biggest oil refiner, as well as smaller companies and municipalities.

“The only way to intensify trade is to increase number of new bonds and new issuers,” Piotr Wolinski, deputy head of Bondspot SA, the Warsaw bourse’s subsidiary in charge of Catalyst, said in a May 10 interview. “Investors who keep bonds to maturity may decide to sell when they have alternatives.”

Extra Yield

The additional yield investors demand to hold Poland’s dollar-denominated government bonds rather than U.S. Treasuries was unchanged at 114 basis points at 12:26 p.m. in Warsaw, according to indexes compiled by JPMorgan. The extra yield on the government’s 10-year zloty notes over German bunds narrowed six basis points, or 0.06 percentage point, to 189.

The zloty strengthened 0.1 percent to 4.1786 per euro, paring this year’s decline to 2.3 percent. The cost of insuring Polish debt against non-payment with credit-default swaps dropped two basis points to 75, up seven points from this year’s low on May 10, data compiled by Bloomberg show.

Poland’s central bank has lowered its main interest rate by 175 basis points since November to a record 3 percent this month. The easing has reduced the three-month Warsaw interbank offered rate, or Wibor, the benchmark for floating-rate corporate notes to an all-time low of 2.8 percent today from as much as 5.14 percent in July.

“We remain optimistic that the reluctance to trade will disappear,” Juan de Porras Aguirre, a Warsaw-based board member of Bank Zachodni WBK SA, the Polish unit of Banco Santander SA, said on May 15. “Falling interest rates and new stronger capital requirements for banks reduce the attraction of keeping corporate securities to maturity.”

Before it's here, it's on the Bloomberg Terminal.