Boosting the corporate bond market a welcome, if long overdue, initiative

Almost two and a half years after its first attempt to breathe life into the country’s perhaps most promising new market, the corporate bond market, the Greek government announced plans last week to pass legislation simplifying issuance procedures and easing borrowing restrictions in order to make this market work. Although the new law is welcome and long overdue, recent experience shows it will take more than that to invigorate the country’s corporate bond market. Finance Minister Nikos Christodoulakis last week outlined the main points of the new draft law. Central among them was the decision to allow company boards to decide on corporate bond issuance without shareholders’ approval, do away with present quotas limiting corporate bond issuance to 50 percent of a firm’s own equity, and permit the issuance of real estate-backed bonds by real estate investment trusts and other companies with a real estate portfolio. Christodoulakis was deputy finance minister in early 2002 when the government passed a law equating the tax rates applied on income earned from government and corporate bonds. If equating the tax rates imposed on income earned from corporate and government bonds was the first major step toward breathing life into the local corporate bond market, the trading of these securities bonds in electronic bookkeeping form was the second. Prior to that, brokerages, banks, the Athens Stock Exchange and the central bank were all reportedly vying to be the venue for the new promising market. Finally, the ASE won over the central bank’s electronic secondary bond market, and the first issue in electronic bookkeeping form started trading on the Athens bourse in October 2001. It was a 45-million-euro, three-year bond convertible into shares of listed company Attica Enterprises issued at par, carrying a 3.25-percent coupon and offering a yield-to-maturity of 6.2 percent upon expiration in December 2004. A few more corporate bond issues have followed since then, with construction company Edrassi-Psalidas and later Attica Enterprises leading the charge with convertible and exchangeable into shares of Edrassi and Attica’s subsidiary Strintzis respectively. Yet faced with a stock market slump now in its third year and the lowest interest rates seen in decades, companies and investors have tried to adjust to the new environment without paying much attention to the opportunities offered by the new market. Firms have found out that it is very difficult in this environment to tap the sluggish equity market to raise cheap funds to finance capital expenditures, and therefore resort to bank lending. Relatively low loan rates, especially for established listed companies, have facilitated the trend, even though it comes at the expense of rising debt-to-equity ratios. On the other hand, the majority of local retail investors seem to show extreme risk aversion and prefer to keep their money in the bank and earn a 2.7- to 4.0-percent interest, buy government bonds or real estate property and wait on the sidelines rather than plow their money into the stock market. Local institutional portfolios are also going through a difficult period, experiencing either net outflows or transfers among various fund categories, i.e. from equity mutual funds to money market funds. Earning a considerably higher yield on bonds issued by well-known local corporations compared to the interest rates earned on bank deposits, repos or government bonds should have been a reasonable alternative investment proposition for many Greek retail investors. However, most retail investors have shunned it, mostly out of ignorance, while Greek institutional investors and banks chose to satisfy their appetite for corporate bonds abroad with at least one large Greek bank experiencing the bitter taste of WorldCom’s bankruptcy. Traders, analysts and others who know the workings of the corporate bond market in Greece and abroad have welcomed the government’s new initiative to ignite interest in the local bond market, but remain skeptical about the final outcome. Some point out that the corporate bond market may thrive in the US, but has yet to become so popular in Europe. They also say that large Greek corporations with an investment grade from well-known international credit agencies already tap the international bond markets for large sums, and that there is little chance they will opt to do so in Greece, even if the local bond market obtains liquidity and depth at some point in the future. They all agree that it is important for the local corporate bond market to take off and become a major source of long-term financing for medium- and small-sized Greek companies, counterbalancing the influence of the large banking system, which usually leads to lax lending criteria and sub-optimal investments by corporations. Still, even if the new draft law to be tabled in the Greek Parliament next month succeeds in removing all bureaucratic hurdles, it will take a lot of work from many parties to make the Greek corporate bond market take off. It will be essential that Greek banks further rationalize their pricing structures for corporate loans, namely increasing their lending margins, to reflect more accurately each company’s credit history, financial health and prospects. It is already known that local banks, pressed by decreasing profits, have started this «rationalization process,» but it may take some time before it is completed and fully reflected in their capital adequacy ratios. It is hard to imagine how this market can actually develop without new sizable corporate bond issues, but it is equally hard to see what will convince corporations to tap this market so long as bank credit remains appreciably cheaper than bond borrowing. The fact that the firms, which have already tapped this fledgling market, chose to go for convertible issues rather than straight bond issues speaks loudly. They simply want to see the bonds converted into their shares rather than having to pay them off. If issuance is important, so is demand. Finding the so called end-clients is very important. This means heavy marketing of the «new» products by banks and brokerages as well as sufficient training of their personnel. At this point, very few bankers or brokers are aware of the pluses and minuses of corporate bonds. Most are either too ignorant or too ill-trained to play their roles. The same holds true for many local institutional investors, who have to be trained as well. The government’s new initiative to invigorate the promising but still underdeveloped Greek corporate bond market should be commended, although it is long overdue. However, the success of the new market rests mainly with the banks’ willingness to rationally price the loans they extend to their corporate customers, and the ability of all parties involved to market the corporate bonds to retail and institutional investors in an effective way. Last but not least, the introduction of International Accounting Standards next year will increase balance sheet transparency and help many listed companies obtain easier credit rating from international organizations.