New bonds can pose risks for unwary investors

Banking and business circles are voicing concern that the strengthening of the corporate bond market, for which Economy Minister Nikos Christodoulakis said last week legislation is to be tabled in Parliament next month, may pose extremely high risks for investors that are difficult to evaluate. They argue that in the midst of a continuously worsening bearish stock market climate and many firms facing serious financial problems, the issue of corporate bonds may amount to a way of shifting the problems onto the backs of the bulk of small investors who have borne the brunt of the stock market collapse from the highs of three years ago. Many listed firms that have seen their stock market valuations collapse have amassed considerable debts that are sometimes impossible to service, with adverse affects on the profitability of banks. Corporate bonds can provide a breather to cash-strapped firms, but if the market is not placed on a sound basis, there are fears that the entrepreneurial risk will be shifted onto the broader public, given the public perception that bonds are low-risk, reliable securities. A prominent banker explained that it is quite easy for the average investor to be enticed by the high yield of a corporate bond without being in a position to evaluate the risk involved. He says the fact that companies issuing bonds will be rated offers little protection. «How many among the broad investing public are in a position to evaluate the ratings? If for instance, a corporate bond with an interest rate of two, three or even four percentage points above Euribor, that is with a yield that can reach 6-7 percent, is a particularly attractive return at a time when a savings account has a net yield of 1.5 percent. However, for a firm to give such a high yield, it means that it carries a high credit risk,» he says. He notes the existence abroad of non-rated bonds, where no one, except investors, undertakes any risk. These bonds yield even higher returns. An institutional investor is in a position to protect himself, but who will protect the private investor, he asks. Even if it is assumed that rating becomes compulsory for the issue of Greek corporate bonds, there is a question regarding who will do the rating. It would be naive to suppose that the entire Greek market will start being rated by Moody’s, «which asks $300,000 just to enter a company,» says the banker. «How many Greek firms, apart from the banks, OTE telecoms, the Public Power Corporation and a few big private concerns will ask Moody’s for a rating?» Real-estate subsidiaries The legislation to be presented to Parliament, drawn up with the help of the Hellenic Union of Banks, introduces the possibility of firms floating bond issues backed by real-estate assets. This will be done by special subsidiaries to which property assets will be transferred. Through the sale of bonds, which carry high interest rates, the company receives in advance future income from its property assets. Corporate bonds, like those backed by real-estate assets or other sources of future earnings, are modern financial tools that have been present in all developed economies for some time. The institution was established by law in Greece in the 1980s, but is now outdated and contains serious distortions. The market for such bonds was effectively choked by a 20-percent tax, but it was not considered mature enough anyway for such instruments to gain ground. In most cases, the very few Greek firms and banks that decided to issue bonds opted to do so in Luxembourg – much more attractive tax-wise. The draft bill in the works provides for the compulsory rating of firms’ creditworthiness and of bonds as a necessary prerequisite. It also equates taxes on corporate or real-estate bonds with those on state bonds, whose yields are taxed at 10 percent. Firms are given flexibility and managers are no more required to obtain prior approval from shareholders; a decision by the board of directors is sufficient. Equally significant is the abolition of the ceiling on the sum for which the bond is issued, which to date cannot exceed 50 percent of shareholders’ equity. Nevertheless, the tax regime that the special real-estate subsidiaries will be subject to is still a matter of consideration, particularly if they enjoy exemption from the property transfer tax, while another crucial issue appears to be the criteria for rating property items, on which, in turn, the size of the interest rate that the bond will carry will depend. It is not clear, for instance, whether the rating will be based on the officially determined «objective» value of property or the commercial one. By contrast, bonds issued by banks, for instance, and backed by future cash flows from loans repaid are an important tool in increasing liquidity, enabling them to free part of their assets for credit expansion.

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