The search for financing in emerging Europe

The Warsaw Stock Exchange has raised investors’ spirits like a blast from the pre-crisis past. While most of Europe struggles to replace dried-up sources of corporate financing, the market is buzzing with new initial public offerings, including the largest in the exchange’s 19-year history.

Poland’s government and a Dutch investor, Eureka BV, sold 30 per cent of PZU, the insurance company, for 8.1bn zloty ($2.3bn, £1.6bn, €1.9bn) in the nine-times oversubscribed offering last month. PZU’s success has persuaded the government to boost the planned IPO of Tauron, the power utility, by 28 per cent to 53 per cent, or $1.2bn (£830m, €1bn).

Elsewhere in central and eastern Europe, companies with growth potential have relied upon private equity. Cash-strapped firms have embraced new shareholders or made equity deals with their creditors.

Apart from high-profile IPOs, Poland moved earlier than others to create modern pension funds, market analysts say. These have provided a ready source of capital for the stock market. Rules require pension funds to place substantial portions of their equity on the Warsaw Stock Exchange, although not necessarily in Poland-based companies.

“Thanks to its functioning private pension system, Poland is the only [central and eastern European] country with a viable capital market that can be used for financing corporate growth,” says Ion Florescu, director of New Europe Capital, a London-based fund manager.

Foreign companies have rushed to list themselves in Warsaw, which has emerged as a hub for budding multinationals. Only 23 out of 341 listed firms are foreign, yet these account for €65bn (£54bn, $78bn), or more than a third of market value, according to the Warsaw exchange’s website.

Before the crisis, state privatisation programmes fuelled IPOs across the central and eastern European area. Governments now resist selling at low prices, although the need for cash to shore up budgets has prompted some sales. Poland, meanwhile, has also seen pure private sector offerings – the sign of a “developed” rather than “emerging” market, some analysts say.

Western stock markets have also attracted new stocks. Total European IPOs thus far this year have been worth nearly $13bn, more than double the amount for all of last year, according to Renaissance Capital, the Russian investment bank.

For most of the continent’s emerging markets, however, corporate plans halted nearly two years ago are still on ice. The Greek debt crisis has added to the uncertainty, undermining prior growth hopes for some of Europe’s least developed financial centres.

With commercial banks also cautious, companies that need fresh capital have relied more than before upon private equity. “The debt market and banks are pretty closed, so equity is the only viable way for companies to expand,” Mr Florescu says.

Although the details differ from country to country, the same tendencies can be seen across the former communist world, from the Baltic states to the largest markets, Russia and Ukraine. “There’s been a fair amount of syndicated bond issues,” says Paulius Kuncinas, regional editor at Oxford Business Group, an emerging markets publishing, research and consultancy house.

Overleveraged companies – of which there are many – have sought to shed their excessive debt by bringing aboard new shareholders. Invalda, a Lithuanian investment firm with liquidity problems, handed part of its shares to its creditors. “Since the debt-for-equity swap was done at an agreed ratio, the outcome has been reasonable for both parties,” Mr Kuncinas says.

For the Baltics, as for Romania, Bulgaria and Ukraine, several years of rapid economic growth largely reflected the buying frenzy in real estate. “Ukraine had a massive credit bubble, with the economy overheating. But Ukraine, as a late starter, got caught out by the crisis,” Mr Kuncinas adds.

Turkey stands apart from eastern European markets. First, growth was driven less by real estate. Second, credit conditions were better, because banks had already cleaned their portfolios after the Turkish crash of 2000. “Turkey went into the current crisis in a position of strength, more similar to the Asian economies,” he adds.

But neither banks nor stock markets are of much help in the fragmented non-EU markets of the western Balkans. Fortunately, Balkan-orientated investment funds, formed in London and other centres before the global crisis, are poised to provide equity injections, investment bankers say. The blessing might be mixed for company owners, as ready cash comes at the price of shared decision making.

East Point Holding – which specialises in wheat, bakeries, transport and metals, mainly in Serbia and Romania – has given additional stakes to equity partners: Reconstruction Capital II, a UK-based fund, and Darby Overseas Investments, part of US-based Franklin Templeton. Acceptance of foreign management expertise should carry the Cyprus-based company to greater heights in the long run, executives say.

Regional giants and western multinationals, meanwhile, have sold off peripheral assets. Belgian-based Interbrew’s eastern European breweries went to CVC Capital Partners. Slovenia’s Istrabenz, in serious trouble, aims to sell Druga Kolinska, a key food and beverage producer.

Another attractive option is financing for specific projects from the European Bank for Reconstruction and Development. The bank’s governors – representing its shareholding states and multilateral financial institutions – last month approved a 50 per cent capital increase, from €20bn to €30bn, to help with investments for the next five years.

The EBRD, World Bank and similar agencies say the energy sector is now one of the best areas for financing. The EU’s adherence to targets for 2020 has kept up demand for alternative energy ventures, which in turn provide opportunities for mid-sized private investors. Croatia, Serbia and Bosnia, with wood chips in abundance, have welcomed private sector biomass projects.

Conventional energy ventures remain attractive where financing is available. Polish oil and gas firms have moved into Ukraine, says Konstantin Golovynsky at Renaissance Capital in Kiev.

Poland takes pride in having the only European economy to show growth through the crisis. One small economy, Kosovo, however, managed 4 per cent growth last year. Local retail groups, lacking any local stock exchange, formerly relied upon EU-based commercial loans to buy buildings in cheap privatisations. Now, the profits will finance new mall construction around Kosovo, says Ramiz Kelmendi, chief executive at Elkos.