One of the biggest challenges facing the development bank community in central and eastern Europe is to help improve the region's debt capital markets. Even the most advanced, such as Poland, Hungary and the Czech Republic, lack the depth and sophistication of their western counterparts, while some of the smaller markets, such as Bulgaria or Slovenia, are only just beginning to hit investors' radar screens.
Both the EBRD and the European Investment Bank, the EU's financing arm, have been active in the region, issuing bonds in a range of local currencies to encourage other borrowers to follow their lead. In the past few years, between them the two supranationals have issued debt denominated in Polish zloty, Hungarian forint, Czech koruna, Slovakian koruna, Russian rouble, Estonian kroon, Slovenian tolar, Bulgarian lev and Turkish lira.
Many of these transactions have been pioneering. Take the EIB's 2014 bond in the Slovenian market that was launched in April 2004. At a 10-year maturity, the bond is the longest-dated Slovenian tolar deal to be issued in the international capital markets. The deal represented a continuation of the EIB's policy of developing the debt capital markets of those countries joining the EU.
diversification
"As an AAA-rated issuer, EIB offers investors a highly secure means of diversification. As the first supranational issuer in Slovenian tolar, the EIB is adding to the range of quality issuers available to investors in SIT bonds," said Barbara
Bargagli-Petrucci, director, head of the bank's debt capital markets department, at the time.
The EBRD was also active in the run-up to EU accession last year. In January 2004, it launched a Ft10 million, five-year Eurobond. The issue, which was well-received by the investment community, took advantage of demand for forint
assets from retail and institutional
investors in continental Europe ahead of Hungary's accession to the EU.
The theory is that these transactions will help investors increase their risk tolerance in a given currency and so widen the potential capital base available to would-be borrowers. Last year, the EIB issued the equivalent of €1.2 billion in central and eastern European bonds, most of them acting as benchmark transactions. While it is not as active a borrower (as its funding programme is not as big as the EIB's), it too issues benchmark deals as part of its remit to develop the region's capital markets.
financing strategy
There are three other main reasons behind the EBRD's local currency financing: as a project financier it is necessary for the bank to be able to provide local currency funding and help mitigate clients' foreign exchange risk, to improve the credit quality of the borrower, and to allow it to be at the forefront of market development.
The first of those reasons is especially important. In the past two years alone, the bank has made 11 loans to clients in local currency, including the Russian rouble, Polish zloty, Czech koruna and Hungarian forint.
Last December, for example, the bank made a R$370 million, 10-year loan for the Togliatti Urban Transport Development project in Russia.
More specifically, the EBRD borrows in local currency: to fund local currency loans through issuance of back-to-back bonds where there is
no available derivatives market, to take advantage of arbitrage opportunities through market anomalies and to widen its investor base.
A breakdown of investors in the bank's debt shows just how successful the EBRD has been in tailoring its issues to meet the demands of the market. In central and eastern European currencies, for example, bond investors are predominantly German, Swiss, Austrian and Italian.
These issues also attract US and UK institutional interest, as well as local insurers and pension funds for longer-dated paper.
improving markets
Although the region's local markets still have weaknesses, they are improving. At the same time, the EIB and EBRD help further improvement of these markets through their transactions.
"We help to raise the regulatory standards of these markets so that they are comparable to those in the rest of the European Union. As a supranational borrower we can help improve liquidity, transparency and infrastructure.
As part of this we look at developing swap and derivatives markets," says Rene Karsenti, treasurer at the EIB.
Last year, the EIB's groundbreaking deals included not just its transaction in Slovenian tolar but also offerings in Russian rouble and Bulgarian lev.
The first was the bank's first synthetic rouble placement (and the first such issue by any borrower in the international rouble market since 1998). The second was the first lev-denominated issue in the international markets.
An integral part of the bank's strategy is to return to these markets. Since the beginning of 2004, for example, the EIB has placed in excess of 10 forint-denominated bonds in the markets with maturities ranging from 12 months to 11 years. This development of its yield curve means that other borrowers have a triple-A rated reference point against which they can launch their bond deals.
Many of the region's markets need to make further improvements on the regulatory and legal side. Settlement and pricing can be potential problem areas. In Russia, for example, the EBRD was obliged to amend terms of Eurobond notes to provide for settlement in US dollars for investors with no access to rouble accounts.
If these markets are to become consistent sources of capital for local and international borrowers, these are some of the issues that need to be resolved. The development of a large, liquid swap market is another consideration for many of the individual market regulators.
However, progress is being made. In Russia, the EBRD has been working with the Securities Commission for the past couple of years on changing bond laws to allow the bank to issue on the same basis as in other international markets.
In early 2003, a new Securities Market Law was implemented, which represented a significant development for Russia's capital market. One of the most important changes was in improving disclosure standards. In Latvia, the EBRD was instrumental in working with the central depository in establishing a bridge to international clearing systems.
drive for dialogue
Dialogue between the multilaterals and the regulators must continue, as well as with the investor community. Even in the more advanced central European countries, which are hoping to join the euro within the next three years, product and market development must carry on.
The development of pension funds, mutual funds and a savings culture in general must also continue, says Steven Kaempfer, a vice-president at the EBRD. This is more evident in central Europe than elsewhere in the region, although Kazakhstan, for example, has also made tremendous progress, he adds. Kaempfer says the capital markets will play a more important role as the region's economies develop, and the needs of local SMEs and industrial corporates for longer-term financing grow.
Significant recent local currency transactions:
December 2004
EIB reopens international rouble market – R$2.1 billion
2010
l First synthetic rouble issue
in the market since 1998
l Longest ever maturity in
synthetic rouble
October 2004
EIB opens eurolev market
– Lev100 million, 2009
l First Bulgarian lev issue
in international markets
l First Bulgarian lev by a
triple-A rated issuer
April 2004
EIB issues its first Slovenian tolar
bond – SIT4 billion, 2014
l Longest SIT bond in the
international markets
l First SIT bond by a triple-A rated issuer
January 2004
EBRD issues Hungarian forint
Eurobond – Ft10 billion, 2009
l Took advantage of demand from retail and institutional investors
l Helped add liquidity to local market
in run up to EU accession