Graham Stack in Kyiv -
Knocked for six by the post-Lehman Brothers collapse in 2008, the Bucharest Stock Exchange (in Romanian, BVB) has decided to kick off the new decade on the right foot, by listing itself - and hoping that others will follow.
"The BVB listing will unshackle lots of positive energies for the domestic capital market," says Stere Farmache, president of the BVB, which has a market capitalization of around €20bn, making it an under-performer in the region, and down from its peak of €25bn hit in 2007. "I hope it will have a demonstrative effect on companies undecided regarding their own listing. What I expect is that the BVB listing will mark a new level of development for the exchange."
In its bid to develop, the BVB wants to attract foreign and institutional shareholders, and the listing will be a first step in this direction. "During recent years, there has been increased interest from foreign market participants in becoming BVB shareholders," says Farmache. "The creation of a liquid market for the BVB shares will help establish a reference price for those."
The BVB will use the funds to upgrade its infrastructure, says Farmache. But more importantly for the future development of the exchange, it hopes its "autolisting" will set an example to domestic companies. The biggest failure of the Romanian market in the noughties was the dearth of major domestic listings, with the exceptions of state energy companies Transelectrica in 2006 and Transgaz in 2008. According to Farmache, recent years have seen "increased interest from national and international investors for Romanian companies, interest which received a pretty poor response from the offer side."
In this context, the BVB's own listing sets an example for other Romanian companies as potential issuers, says Farmache. Stock market operators can use the BVB flotation as a model for local companies.
Five SIFs and a PF
With domestic listings scarce, the BVB remains dominated by the sprawling closed-end funds that were originally vehicles for voucher privatization in the 1990s, and then floated on the stock exchange in 1999. The five regional Financial Investment Funds (Romanian acronym SIFs) together account for 40-50% of the BVB's liquidity.
Over 2m Romanians traded their privatisation vouchers for shares in the SIFs when they were floated. 10 years on and individuals still hold over 50% of the total number of shares, while foreign investors own over 20% of their share capital. The SIFs thus hitch Romania's stock market to movements on global markets. "Buying SIFs has been considered a proxy for getting exposure to the Romanian assets sub-class," says Raiffeisen Capital & Investment analyst Alexandru Combei.
According to Erste Bank, the SIFs are a mixture of gold and mud. The gold are their post-privatisation stakes in top Romanian banks. Together, SIFs own 30.12% of Banca Comerciala Romana and 25.2% of BRD Groupe Societe Generale, Romania's two largest banks. Some 55-76% of SIF assets' fair value derive from their minority stakes in banks. The mud is much of the rest. "Less than half of the companies in SIFs' portfolios were profitable in 2008, and a substantial number of stakes are currently held in companies that are under bankruptcy, insolvency or liquidation procedures," according to Erste. Because of this as well as some corporate governance issues with SIFs, the shares of SIF trade at a significant discount to the fair value of their assets.
In addition, foreign investors' exposure to SIFs has been crimped by an ownership threshold of only 1%. This threshold limit is dodged by Romanian investors, who simply use different vehicles to purchase shares. But foreign investors have abided by it for compliance reasons.
Now Romania's parliament looks set to lift the threshold to at least 5% this year, and eventually possibly abolish it entirely, which should stimulate the appetites of foreign investors. The markets have already reacted positively to the news. "The recent legislative debates regarding the extension or removal of the shareholding limit brought even more liquidity for the five companies," says a BVB source. According to Erste, the move could lead to a surge in value to correct the discount.
A third driver for the Romanian market expected in 2010 is the possible floatation of the currently state-owned Property Fund (in Romanian, Fondul Proprietatea), which was intended as the vehicle to compensate Romanians who had assets expropriated by the communists. For such a contentious and political issue, it's perhaps not surprising that the process of setting up the Property Fund - which holds a host of minority state stakes especially in energy companies and is valued at $3bn-4bn - has dragged on for years, and seemed to have got derailed again at the end of 2009 during down-to-the-wire presidential elections.
But with President Traian Basescu returned to office, it was announced in January that preparations for a floatation would go ahead, and a contract would soon be signed with the new fund manager Franklin Templeton. In an interview with bne in November, then-Property Fund head Dana Lulache said that the listing would be "theoretically doable" within six to 12 months of Franklin Templeton taking over. "The chances are growing that we will see the Property Fund on the BVB in 2010," Finance Minister Sebastian Vladescu declared optimistically on February 9.
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