Trapped in Liquidity Mismatch, Polish Funds Shop for Debt Abroad

  • Nationale-Nederlanden, PZU turn to offshore corporate market
  • ECB expanding asset purchase program may boost coporate notes

Poland’s biggest institutional investors are outgrowing the nation’s corporate bond market and taking more of their money abroad.

The country’s biggest mutual fund, PZU TFI SA, is readying a new open-end strategy allowing its clients to invest in Eurobonds issued by foreign companies, Chief Executive Officer Tomasz Stadnik said last week. The largest pension fund, Nationale-Nederlanden PTE SA, has started buying corporate debt abroad and may step up investments after the European Central Bank expanded its asset-purchase program to the corporate-bond market.

Both cite the lack of a working secondary market to trade zloty-denominated company debt, which boosts risks for investors who can’t easily sell their holdings should companies’ fortunes worsen. The nation’s official interest rate is at a record low, which encourages Poles to seek fixed-income alternatives to the low returns on government-bond and money-market funds. Stocks are trading around levels last seen in 2009.

“There is more and more demand for fixed-income products because the Warsaw Stock Exchange is weak and returns on bank deposits are low,” Stadnik, whose funds oversee the equivalent of $5.3 billion, said in an interview. “Unfortunately, basing such products on local corporate bonds creates a liquidity mismatch, as clients can withdraw their cash at any moment while we can’t exit company debt -- so we must go abroad.”

The ECB’s March 10 decision to expand asset purchases to include the region’s $980 billion corporate-debt market as part of its latest stimulus measures to kick-start the euro-region economy will boost returns and increase the allure of the foreign bonds, according to Kamil Sobolewski, head of fixed income at Nationale-Nederlanden, which oversees $8.4 billion.

“That will generate additional demand for euro-denominated securities issued by non-financial companies,” he said.

Banks Rule

Poland has tried to revive its local corporate market by allowing banks to trade notes directly on the Warsaw Stock Exchange, boosting bondholder rights and spurring issuance of mortgage-backed securities.

The attempts haven’t succeeded: banks are still the biggest buyers of corporate debt and continue to hold the notes to maturity. Just 2.4 percent of the total volume of corporate debt outstanding traded on the Catalyst corporate bond platform last year, compared with 1.6 percent six years earlier, when Catalyst was launched.

Local-bond issuance has also slumped. Polish companies sold 19.6 billion zloty ($5.09 billion) of bonds in 2015, or 8 percent less than the year before, Fitch Ratings data show. Small transactions dominated the market, making investment more difficult for large funds like Nationale-Nederlanden or PZU. That’s also the reason zloty-denominated pension funds started reducing their corporate debt holdings since August, according to Polish Financial Supervision Authority data.

Equities have offered little shelter. The WIG20 index of Poland’s biggest and most liquid stocks fell for a record ninth months through January. The index has dropped 25 percent since a May peak amid a selloff in emerging markets and political instability under the new Law & Justice government, which taxed banks and increased spending.

Nationale-Nederlanden has invested 374.2m zloty, or 1.1 percent of its local portfolio, in foreign corporate bonds, after starting last year. It’s holdings so far include debt issued by Wal-Mart Stores Inc., Sanofi-Avensis SA, Vodafone Group PLC, Coca-Cola Co. and Electricite de France SA and may grow further, its annual report shows.

“We see chances for good returns,” Sobolewski said.

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