Domestic corporate bond market fails to draw investors’ attention
A year or so prior to Greece’s entry into the European Monetary Union (EMU), a number of bankers and others thought the time was ripe for the country to grasp the opportunity and develop a brand-new market which would serve both the needs of local retail investors and local companies seeking an alternative source of financing. Two years into the eurozone and counting, a liquid corporate bond market has yet to develop as banks continue to price corporate loans cheaper than warranted by borrowers’ credit ratings and companies shy away from disclosing public information about the use of the proceeds. It was a good bet, even if it did not have the history behind it. After all, corporate bond markets with enough depth and liquidity can be found more easily in the USA than in Europe. Still, hurt by the sharp fall in equity prices, local investors turned to safer investments in the aftermath of the stock market bubble, namely bank deposits, repos and government bonds, only to find out that the already low deposit rates and bond yields got lower as the European Central Bank (ECB) cut its key policy interest rate to fight off economic recession. The timing could not have been better perhaps, but it ran into another problem. The likely investors knew little about corporate bonds trading in an electronic bookkeeping form on the Athens Stock Exchange. Educating investors takes time and requires a long-term consistency and commitment by both bankers and brokers at stock market brokerages. Brokers, however, had little incentive to provide it either because they did not have the know-how or because commissions were much lower compared to stocks. Bank employees at branch networks also had to be educated and this too required some effort and resources. This did not mean banks were indifferent to the creation of a liquid bond market since substituting bank loans with corporate bonds would allow them to boost their capital base. Corporations, on the other hand, understood they could not tap the Athens bourse to raise the needed capital cheaply like in the old good days, turning to banks for loans to finance their investment plans and working capital needs. Lower interest rates easing the pain of servicing loans did little to persuade them to turn elsewhere. Educating chief finance officers (CFOs) at corporations about the merits of alternative sources of financing, such as issuing corporate bonds, was also necessary, but again time was valuable and bank resources scarce. In addition, other major roadblocks to the creation of a liquid local corporate bond market were not removed until last summer when legislation simplifying issuance procedures, such as giving boards the right to decide without asking for shareholders’ approval, was passed. Equalizing the tax rate on income earned on government and corporate bonds to 10 percent had been done a few years earlier. Facing this reality, it was no accident that all corporate borrowers seeking funding by issuing bonds chose to come out with convertibles rather than straight coupon bonds. The reason was they hoped their stock prices would rise on time, making it profitable for bondholders to convert the bonds into shares so they would not have to repay them in full. This way, the companies would not have to pay the enhanced principal promised to their bondholders at maturity. Un-rated companies which sought to issue convertible or exchangeable bonds included listed Attica Enterprises, Edrassi-Psalidas and holding company Elbisco. Bankers who are familiar with the peculiarities of the local corporate bond market say there is greater appetite for corporate bond paper, especially with maturities of two-to-three years but there is little interest by listed corporations to issue bonds. The main reason has to do with bank credit which remains cheaper despite steps taken by the banks in recent years to charge bigger spreads over Euribor, the reference interest rate, in a bid to rationalize their pricing. A few large caps, such as Coca-Cola HBC, OTE, PPC and others, have been rated by the international credit agencies and tapped the international capital markets for relatively big amounts. Bankers recognize the existing discrepancy in pricing but point out the need to maintain a good working relationship with a corporate client, bringing them a lot of other income in the form of fees as well as deposits. Interestingly enough, the legislation, which was passed in the summer of 2003 to help boost the local corporate bond market, gave both banks and corporations incentives either to refinance existing syndicated bank loans with corporate bonds or issue corporate bonds by doing away with the 0.6 percent contribution under Law 128 and two other collateral-related costs. However, these corporate bonds, unlike the ones traded on the Athens bourse, are kept by banks on their books and do not require that companies disclose the use of the money borrowed publicly. When the bonds are traded, companies are required to provide public information about the use of the proceeds and may be called upon to prove they were used for the intended purpose, and later on be subject to penalties if they fail to do so. All these have kept the local corporate bond market small and illiquid, depriving retail investors the opportunity to seek higher yields on local fixed income investments other than government bonds. Given the fact that a number of bureaucratic obstacles to the development of the market have been removed and user-end demand for bonds of this type is stronger than before according to bankers, the key is once again in the hands of both banks and corporations. Banks can help make this market blossom by pricing corporate loans more rationally, forcing corporations to look for alternatives, while the latter should come to understand the benefits of corporate governance, including full disclosure.
