Aviva Sounds Alarm as Revamp Menaces Company Debt: Poland Credit

Poland’s plan to overhaul private pension funds will impede growth of corporate bond sales as it reduces the cash available for buying company debt, local units of Aviva Plc, Allianz SE and UniCredit Spa said.

Pension funds will cut holdings of corporate debt and think twice about rolling over outstanding notes after changes, according to Marcin Pulit of Bank Pekao SA, Poland’s biggest arranger of corporate bond sales. The 14 privately managed institutions that invest contributions from 16.2 million Poles had expanded their corporate bond holdings 2.6 times since the end of 2010 to 10.9 billion zloty ($3.3 billion), or 3.9 percent of their assets. German pension funds put 24 percent of their assets in such debt in 2011.

Companies planning to tap the bond market will be well advised to speed up sales after the government recommended three alternatives for bolstering public finances while depleting pension funds’ assets, portfolio managers from Aviva PTE SA and PTE Allianz Polska SA said July 3. None of the options bodes well for corporate bonds, which already suffer from low liquidity caused by scant supply and the tendency of banks and funds to hold debt to maturity.

“The whole idea risks damaging the market,” Rafal Trzop, deputy chief investment officer at Allianz’s Warsaw-based pension fund, which has 8.5 billion zloty of assets under management. said in an e-mail on July 3. “Under any of the government’s proposals, pension-fund assets will be depleted, which reduces the appetite for corporate notes.”

Government Review

Poland published a review of its three-tier pension system, which includes a second pillar of privately managed funds to supplement the state-controlled Social Security Fund, on June 26. Its recommendations, meant curb public debt, include canceling government bonds held by pension funds. Under two other scenarios, all Poles enrolled in the funds would be transferred back to the pay-as-you-go state system unless they request to stay.

The government will choose from this policy menu at the end of August, after a two-month public discussion, Prime Minister Donald Tusk said on July 2. The 14 pension funds held 280 billion zloty in assets at the end of May, with Treasury debt accounting for 43 percent of their portfolios, followed by stocks at 39.6 percent, data from the country’s financial watchdog show.

‘Last Call’

Pension funds bought half of Poland’s biggest local-currency issue of company debt, the 2.5 billion-zloty offering by gas utility Polskie Gornictwo Naftowe i Gazownictwo SA in June 2012. They took 82 percent of power utility Energa SA’s 1 billion-zloty bond in October and 62 percent of similar-sized issue by refiner PKN Orlen SA in February of last year.

“It’s last call for issuers to seek financing from pension funds, provided they’re still willing to take on illiquid corporate paper,” Maciej Karasinski, Warsaw-based fixed-income manager in Aviva PTE, Poland’s second-largest pension fund with 62.8 billion zloty under management, wrote in e-mail on July 3. “Without us, liquidity will be much lower, which should widen risk spreads.”

New Sales

New debt sales may be the last thing on local companies’ minds after the U.S. Federal Reserve’s comments on possible withdrawal of stimulus drove down emerging-market bonds. The price of 2022 dollar notes from PKO Bank Polski SA, Poland’s biggest lender, has fallen 6.7 percent so far this year, compared with a 4.5 percent drop in the Bloomberg USD Emerging Market Corporate Bond Index.

Bond sales in the pipeline include a 1.5 billion-zloty issue from Tauron Polska Energia SA, the state-controlled power utility, according to April 16 comments by Chief Financial Officer Krzysztof Zawadzki. Kompania Weglowa, Poland’s biggest coal producer, wants to sell 1.3 billion zloty of three-year notes, Chief Financial Officer Jacek Nowak said on May 23.

Polish companies, including banks, sold 4.8 billion zloty of new zloty notes in first five months of this year, data from Fitch Ratings show. That compares with 24.9 billion zloty in a record 2012. PGE SA, the country’s biggest power utility, placed 1 billion of zloty bonds last month after state-owned Bank Gospodarstwa Krajowego stepped in to buy about half the notes. Pension and mutual funds accounted for 7 percent of the sale.

‘Cut Exposure’

“Pension funds may not roll over all of their maturing debt in coming years and issuers will have to seek other buyers, which is what we’re advising them to do,” Pekao’s Pulit, director of fixed-income sales at the Warsaw-based bank, said by phone on July 3. “They’ll remain very interested in corporate debt but will be looking to diversify and cut exposure to individual issuers.”

The extra yield investors demand to hold Polish dollar-denominated bonds rather than U.S. Treasuries fell six basis points to 143 today, according to indexes compiled by JPMorgan Chase & Co. The additional yield on Poland’s 10-year zloty bonds over German bunds fell one basis point to 229.

The cost of protecting Polish debt against non-payment using credit-default swaps fell one basis point to 93, data compiled by Bloomberg show.

Managers from Aviva and Axa’s pension funds said they’re not planning any immediate adjustments to their strategies while they await the cabinet’s verdict. Poland’s public debt could fall by as much as 11 percentage points of gross domestic product if funds’ government bond holdings are canceled, to be replaced with individual accounts at the Social Security Fund.

“In theory, we could avoid losing assets by shifting out of Treasury bonds into stocks and corporate debt, but nobody can be sure about the final shape of the reform,” Robert Garnczarek, Warsaw-based Chief Executive Officer of Axa PTE pension fund, which managed 17.6 billion zloty of assets, said by phone on July 3. “What we can expect is more issuers rushing to the market before the assets get taken away.”

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