The Czech Republic was once seen as one of the most stable and prosperous of post-communist states. But political and financial crises in 1997 shattered this image. Investors fled from Czech koruna when the current account deficit, peaking at 8% of GDP in 1996, became unsustainable and devaluation sent coupons up to 20% (see MTNWeek, issue 43). But time has allowed the wounds to heal. In 2000 the yields have dropped to sensible levels and dealers report more enquiry than ever. And the deregulation of the domestic market in April means Czech investors have been able to entice more borrowers into issuing. Deutsche Bank is the leading house for all koruna notes this year. It has done $325.7 million-worth of business off 11 trades, according to MTNWare. Alex Haidas, senior Euro-MTN trader at Deutsche Bank, says: "We've definitely seen an increase in enquiry on previous years, and this is mostly driven by favourable basis swap levels and attractive credit spreads. Most of the demand comes from Eastern European banks and retail investors." But not everyone has seen enquiry throughout the year. Mehmet Artun, director, emerging markets, at Westdeutsche Landesbank (WestLB), thinks issuance has been variable. He says: "The majority of our issuance in Czech koruna happened in the first half of the year, and is due to the opening up of the Czech domestic market. Now though, the levels are up on Polish zloty and koruna issuance is quite irregular." The biggest return of confidence has come in the non-syndicated sector. There was one koruna trade in 1998, and nine trades in 1999. This year 18 non-syndicated trades have already been issued and both dealers and issuers say more are in the pipeline. Commerzbank has been bookrunner off five non-syndicated trades this year, more than twice that of anyone else. Francisco Perello, senior trader at Commerzbank, says: "The perception of the troubles we saw in 1997 has improved immeasurably. We're still not seeing many deals over five years being done, but investors are now much more comfortable with the paper." Last year 11 of the 26 trades done in Czech koruna were over 5 years. This year just 4 of the 51 trades, private and public, done so far are over five years. This may reflect an inhibition on the part of the investors, and issuers are keen to encourage them towards the longer end. Scottish Power did two five-year koruna trades this year off its $4 billion debt issuance programme. Donald Wright, assistant group treasurer at Scottish Power, says: "We will now be trying to extend our maturities by not posting levels for paper of less than 10 years. But if we see enquiry for short-term notes, koruna or otherwise, we will obviously see what we can do." This unfussy attitude of issuers plays a big role in easing investors back to the market, but changes in regulations have also helped. In April this year domestic Czech investors were given extra breathing space when it came to buying koruna Euro-MTNs. Artun, at WestLB, says: "The investor base for koruna is mostly domestic, and the pick up in activity is down to this market." And with the likelihood of the Czech Republic joining the euro soon, investors are persuading a diverse range of issuers into the koruna market. Corporates are just as popular as private banks, and this is especially true if the name is a well-known brand. Haidas, at Deutsche Bank, says: "Investors from the area do like household names and there seems to be a preference for corporates. This is why car manufacturers are comparatively regular issuers." In the last 18 months BMW, DaimlerChrysler, Ford, General Motors, Peugeot and Volkswagen have all issued Czech koruna. Laetitia de Charentenay, private EMTN issuance at Peugeot, says: "The main reason we placed notes in Czech koruna was that we wanted to try something in that currency. Plus, the market is developing and is also a bit cheaper than elsewhere." A good name is important for all investors in koruna, but there is a split when it comes to credit rating versus yield. Artun, at WestLB, says: "European investors like a good credit rating. It's difficult to sell single-As to them. But Czech domestic investors are more interested in yield." And compared to Polish zloty, koruna is not the most generous of currencies. A five-year Kr1 billion ($24.71 million) note from GMAC will pay 7%, whereas a five-year Z100 million ($21.87 million) note from the same issuer will pay 12.25%, according to MTNWare. It means that zloty is stealing the limelight at the moment and with the Czech Republic's history of a volatile economy some investors may be reluctant to buy much more koruna paper. But Artun is unconvinced. He says: "The memories of the past difficulties are over. It's more to do with the koruna yield curve being very tight compared to zloty that is making zloty more attractive at the moment." But demand for koruna is still there. De Charentenay, at Peugeot, says: "We have already done four koruna trades and there is one more in the pipeline, so we know there is interest out there." And dealers all report encouraging signs that demand will continue. Haidas, at Deutsche Bank, says: "As the market in Czech koruna grows there will be more demand via reverse enquiry. Demand will probably stay around the one- to two-year band, and as long as the country remains on a European Union-bound course it will continue to grow."
November 17, 2000
