Corporate bonds right recipe for yield-hungry, risk-averse Greek investor

A few months have passed since Greece’s first dematerialized corporate bond started trading on the Athens Stock Exchange (ASE), but the promising new market has yet to show it has what it takes to become the focal point of the local investment community. It should not need to. With the ASE still on a downward trend, reinforced by a series of negative news items regarding the failed privatization of Olympic Airways, poor earnings reports and criminal charges leveled against the chairman of listed Intracom, low bank deposit rates and seemingly low government bond yields, corporate bonds should be the right recipe for the yield-hungry, risk-averse Greek investor. Many hopes were pinned on the launch of Greece’s first dematerialized corporate bond issued by listed Attica Enterprises last October. The three-year bond carried a 3.25-percent coupon and offered a 6.2-percent yield-to-maturity to those who held it until expiration. The bondholder also had the right to change it into ordinary shares of Attica Enterprises at specific points in time. A week or so ago, Edrassi-Psalidas construction company became the second local firm to issue a similar bond traded on the Athens bourse, and bank sources say a couple more will follow in the next few weeks. Alpha Bank was the lead underwriter in both issues. Analysts and bankers alike, who used to point to the heavier taxation of corporate bonds compared to government bonds to explain Greece’s limited progress in developing this much promising new market, now blame it on the small size of the new issues and the lack of sufficient marketing, mainly by banks. With taxation not discriminating against corporate bonds, small size and marketing seem to be the natural candidates. Bankers also point out that part of the problem has to do with the platform on which these bonds are traded. They claim corporate bonds should be traded on the central bank’s secondary electronic market and not on the Athens bourse. They say trading on the central banks’ platform would produce a more liquid market with tighter bid-ask spreads and avoid problems related to the lack of experience and bond-training that is typical of staff at local brokerage houses. Yet banks play a major role in underwriting the new bond issues and they themselves own brokerage houses. Moreover, some bankers blame others for keeping a good deal of any new bond issue on their books, which along with their small size does not help the new fledgling market’s liquidity. Nevertheless, it is clear that there is an information deficit about corporate bonds which extends from bank and brokerage staff to many corporations’ top and middle management to the final buyer, that is the Greek retail investor. Although it is easy to understand why the top management of Greek corporations does not want to give up on traditional bank borrowing, even if they understand the mechanics of corporate bonds, it is not easy to understand why other interested parties, that is the government, banks and securities firms, have done so little for so long to help this market get off its feet. Greek corporations either do not know the advantages of bond issuance in order to finance their projects or they do not want to do so because bond issuance is relatively more expensive to the traditional bank credit. Bankers admit privately that even those corporations willing to go ahead with new issues do so because they hope their stock shares will rise on the Athens bourse in the next couple of years so that bondholders will find it profitable to convert them into shares and spare them the costs associated with repaying the bond. This way, they hope, they will be able to reduce the average cost of the bond below the levels of comparative bank credit. However, Greek corporations accustomed to borrowing at very low spreads over the reference interbank rates may be in for a big surprise as banks rationalize their lending practices to take into account the cost associated with their solvency ratios. By doing so, they will inevitably lend at much wider spreads, giving corporations reason to think of alternative sources of financing, including corporate bonds. Banks, corporations and the government alike have done little to breathe life into Greece’s most promising new market. It is in their best interest to work together to clear all obstacles to developing this brand-new, efficient market and educate their personnel and the general investment public about the pros and cons of corporate bonds. Time is not running out but it is still precious. The sooner, the better.

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