First corporate bond issue in a promising market

An important announcement about a convertible bond issue by a major Greek company was published without fanfare last week, but few people took notice. Yet this convertible issue has the potential to make history and jump-start one of Greece’s most promising markets, the corporate bond market. Coming out at a time of aversion to high risk, this bond issue and the others which will inevitably follow hold the promise of improving local investors’ degree of portfolio diversification and satisfying Greek companies’ fund-raising needs. It is our belief it is prime time for Greece’s corporate bond market to take off and everybody involved should do its best to make sure all remaining problems are being ironed out. Attica Enterprises, a well-known holding company active in the shipping sector, issued last Thursday a 45-million-euro, three-year convertible bond, carrying an annual coupon of 3.25 percent with a nominal value of 10,000 euros. Each bond can be converted into 1,908 common shares of Attica Enterprises. According to Alpha Bank’s treasurer George Georgiou, the bond offers a yield to maturity of 6.22 percent if not converted into shares, and high annualized yields to call if called by the company. The difference between this issue, which is managed by Alpha Bank, and previous corporate bond issues is that it will be traded on the Athens bourse in electronic form and settlement will follow the usual bourse procedures. Faced with a bear stock market for the last couple of years, the average Greek investor has finally given up and sought refuge in safer investment classes such as money market instruments and, to a lesser degree, government bonds, despite falling money market rates and low bond yields in a bid to protect his capital at a time of increased risk aversion. According to the latest available figures, more than 11 trillion drachmas sit in repos, earning at best a minimal real rate of return (the nominal return minus the inflation rate). At the same time, the sorry state of the Athens stock market has brought capital fund-raising activities by firms almost to a halt. The combination of minimal to negative real rates of return on the one hand, which must have adversely affected private consumption spending, and less money available to finance capital expenditures by companies on the other hand, is certain to be a drag on aggregate demand and economic growth at the difficult time of a global economic slowdown. Although the Greek economy is fortunate to be able to rely on huge inflows from the Third Community Support Framework and also reap the benefits of low lending rates in order to weather the present global economic and financial storm, everybody agrees this is not enough. Greece has to take advantage of the situation and lay the foundations for higher long-term economic growth rates. The corporate bond market, straight or convertible, could play a significant role in improving the efficient allocation of resources and raise the economy’s potential growth rate in the future. Up to now, the two major hurdles to the successful launch of the Greek corporate bond market were dematerialization (electronic entries instead of physical paper) and the lack of a secondary bond market. To the extent that these two problems have been solved, and it looks as if this is the case, the local corporate bond market will not disappoint its proponents. This does not mean the job is done. Market makers, mainly banks and private brokerages, will have to explain to the average risk-averse investor, who has never heard or been exposed to this product, the advantages and disadvantages of straight or convertible corporate bonds. These bonds may offer the promise of a higher return but this comes at the cost of a higher risk, mainly in the form of credit risk. The fact that most local corporations have yet to be assigned a credit rating by a well-known agency complicates the pricing of these issues, unduly increasing investors’ concerns. Market makers will also have to educate corporations about the pros and cons of these bond issues. It is known, for example, that hedge funds and other investment companies thrive on making lots of money by buying bonds convertible into shares while engaged in short selling the underlying shares at the same time. In doing so, they put disproportionate pressure on the price of a company’s underlying shares. After years and years of waiting, it seems the moment has come for all interested parties to work together to deal effectively with all remaining problems so that Greece’s most promising market in a decade can take off. The Athens Stock Exchange authorities, the Capital Markets Commission, the government and likely market makers should do their best to launch this new market successfully. It is prime time to do so, as well as the time being ripe. Everyone hopes for a speedy end to the crisis. But it appears the forces of fanaticism have given in to lunacy and no one knows where it will all end.

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