Sputtering investments
The tepid local economy is beginning to heat up the competition among investment banks.
Investment banks toast the days when the Warsaw Stock Exchange was nearing its apex, and emerging-market debt investors worldwide began sidling up to Polish securities and the growing fee components of their financial transactions - even from now-sluggish privatisations - lined their pockets.
That was the late 1990s. And although some bad investments in those heady days forced local and foreign firms to write off millions, today there are few public or private companies that are of any interest to bankers at all, which leaves them pining for transactions on the domestic market.
And, bankers say, owing to this dearth of quality deals the market for stock offerings, bond deals, privatisations and mergers and acquisitions is more competitive than ever. Time will tell how the nation's bankers will match up on potential deals.
The cresting ranks of the unemployed, stagnating domestic growth and slowing privatisation have blotted most elements of the country's industry. Companies either streamline or bow out of the market. Many investment banks once able to more or less cherry-pick new clients have been forced to wholly renovate their business models, and are currently choosing between tapping what were once mediocre deals (in the €80 million range), or exiting the country or an industry altogether.
Wojciech Kostrzewa, BRE Bank's chief exe-cutive, has said that in view of the market reality, aggressive firms will put more focus on retail banking rather than investment banking. Rafał Gębicki, director of the corporate finance department at WestLB Polska, said he has recently asked management at the Germany-based bank to let him maintain a larger staff to compensate for the lack of once standard €300-€400 million deals to target local companies seeking to either float equity or bonds worth €70-€100 million.
Other firms, such as ING Baring, Credit Suisse First Boston, Deutsche Bank and Merrill Lynch have also seen their business, fall over the past two years, at least in terms of completed transactions.
"There is a limited amount of projects available," said Paweł Gricuk, president of JP Morgan Chase Bank's Polish operations. "And it's very competitive." Just over a year ago, following the merger of JP Morgan and Chase, the combined entity shut its brokerage office in the country.
In any good contest, serious competitors rethink and sharpen their game plans. "This downturn forced us to create a new policy in investment banking," said Gębicki of WestLB. "Of course, everyone wants to make a deal for €300-€400 million, but if you look at the Polish market, what can be a deal like this? Maybe Polkomtel, Era (Polska Telefonia Cyfrowa), TPSA, PKN Orlen and one or two banks and that's all - six or seven entities that are in a position to issue such amounts."
This has caused WestLB to re-evaluate its role in the country.
"At the current stage, unfortunately, there will not be such large deals," Gębicki said. "So I would like to refocus WestLB on medium-sized deals of around €100 million. I joined six months ago and spoke with the management. I said, 'There's no doubt that everyone would like a deal of more than €100 million, but deals of €70-€80 are also good.' Of course they are not so prestigious. But everyone should know his place on the market."
He explained that for a firm such as WestLB to stay afloat as the economy hopefully convalesces, it must zero in on smaller transactions. He would not divulge which companies the firm is talking to on the debt side, but said pharmaceuticals, energy, and niche-oriented information technology and telecom companies are viable debt issuers.
That, however, does not translate into an easy road ahead for cash-needy companies. "Anyone can issue such a big offering, but it's impossible to find investors," Gębicki said.
And towards recovery, market watchers said that it's up to investment banks pitching these transactions to prove to the companies that they have the winning ways to convince investors - especially cash-rich pension funds.
This milieu, which has caused the likes of WestLB to shift its strategy, has also forged a market in which most firms are advising on privatisations and pushing bond deals, but laying low in the equity markets. Some bankers agree, for instance, that the sorry state of the Warsaw Stock Exchange - illiquid and over-regulated - has for the near term put the brakes on most stock offerings, which usually yield firms the most fees.
Debt capital markets are the most logical place for bankers to make transactions, especially because there is often a negative correlation between stock and bond market performance.
For tier-one investment banks, such as JP Morgan Chase and Deutsche Bank, this severity of the market is softened by the fact that they have close relationships with the finance ministry, a perennial issuer of investment grade bonds. This was most recently evidenced by the two firms' completion of a e1.5 billion bond for the ministry this year, one of the largest ever in central and eastern Europe, according to JP Morgan Chase's Gricuk.
While there's still competition to win a lead manager spot on ministry deals, transactions in the hundreds of millions of euro range usually allow for more than one firm to be on the cover.
"Poland on the debt side is perceived as a European Union country," Gricuk said. "It's great, as you can see many of our tombstones on the debt capital markets are for the government."
He said today JP Morgan Chase tends to complete deals with Schroeder Salomon Smith Barney and Deutsche Bank. But in the past, it also worked with both Credit Suisse First Boston and Merrill Lynch, both of which, he said, have been less visible in the country.
Privatisations are also an important component of investment banking business. As the treasury ministry has been conspicuously slow in selling off state-owned assets. The few that are slated to be partially sold, such as PKO BP, PZU and Polskie Huty Stali, have created a stir among investment bankers eager to win tenders to advise on sell-offs or to underwrite stock or bond offerings.
They even have WestLB's Gębicki's ears pricked. "On such a deal, you must be there," he said. "There's no chance to win if you are not there."
Usually last on any banker's optimistic list of business prospects are equity transactions, especially IPOs. JP Morgan Chase, for one, felt the brush-off by equity investors when it tried to float an IPO of ITI Group in July.
"We thought it was a good equity story," Gricuk said. "Unfortunately, for a variety of reasons the Polish investors were not interested."
But Gricuk said that past failures should not force potential IPOs to the side. For the WSE and investment banks to flourish, "there has to be more companies." ITI officials have tentative plans to try to tap the WSE again when the markets improve.
But Gricuk admitted that is has been difficult for most investment banks trying to float equity offerings because the WSE is not "user-friendly," and is over-regulated and illiquid.
"A number of companies would be willing but they are prohibited," he said.
Investment banks toast the days when the Warsaw Stock Exchange was nearing its apex, and emerging-market debt investors worldwide began sidling up to Polish securities and the growing fee components of their financial transactions - even from now-sluggish privatisations - lined their pockets.
That was the late 1990s. And although some bad investments in those heady days forced local and foreign firms to write off millions, today there are few public or private companies that are of any interest to bankers at all, which leaves them pining for transactions on the domestic market.
And, bankers say, owing to this dearth of quality deals the market for stock offerings, bond deals, privatisations and mergers and acquisitions is more competitive than ever. Time will tell how the nation's bankers will match up on potential deals.
The cresting ranks of the unemployed, stagnating domestic growth and slowing privatisation have blotted most elements of the country's industry. Companies either streamline or bow out of the market. Many investment banks once able to more or less cherry-pick new clients have been forced to wholly renovate their business models, and are currently choosing between tapping what were once mediocre deals (in the €80 million range), or exiting the country or an industry altogether.
Wojciech Kostrzewa, BRE Bank's chief exe-cutive, has said that in view of the market reality, aggressive firms will put more focus on retail banking rather than investment banking. Rafał Gębicki, director of the corporate finance department at WestLB Polska, said he has recently asked management at the Germany-based bank to let him maintain a larger staff to compensate for the lack of once standard €300-€400 million deals to target local companies seeking to either float equity or bonds worth €70-€100 million.
Other firms, such as ING Baring, Credit Suisse First Boston, Deutsche Bank and Merrill Lynch have also seen their business, fall over the past two years, at least in terms of completed transactions.
"There is a limited amount of projects available," said Paweł Gricuk, president of JP Morgan Chase Bank's Polish operations. "And it's very competitive." Just over a year ago, following the merger of JP Morgan and Chase, the combined entity shut its brokerage office in the country.
In any good contest, serious competitors rethink and sharpen their game plans. "This downturn forced us to create a new policy in investment banking," said Gębicki of WestLB. "Of course, everyone wants to make a deal for €300-€400 million, but if you look at the Polish market, what can be a deal like this? Maybe Polkomtel, Era (Polska Telefonia Cyfrowa), TPSA, PKN Orlen and one or two banks and that's all - six or seven entities that are in a position to issue such amounts."
This has caused WestLB to re-evaluate its role in the country.
"At the current stage, unfortunately, there will not be such large deals," Gębicki said. "So I would like to refocus WestLB on medium-sized deals of around €100 million. I joined six months ago and spoke with the management. I said, 'There's no doubt that everyone would like a deal of more than €100 million, but deals of €70-€80 are also good.' Of course they are not so prestigious. But everyone should know his place on the market."
He explained that for a firm such as WestLB to stay afloat as the economy hopefully convalesces, it must zero in on smaller transactions. He would not divulge which companies the firm is talking to on the debt side, but said pharmaceuticals, energy, and niche-oriented information technology and telecom companies are viable debt issuers.
That, however, does not translate into an easy road ahead for cash-needy companies. "Anyone can issue such a big offering, but it's impossible to find investors," Gębicki said.
And towards recovery, market watchers said that it's up to investment banks pitching these transactions to prove to the companies that they have the winning ways to convince investors - especially cash-rich pension funds.
This milieu, which has caused the likes of WestLB to shift its strategy, has also forged a market in which most firms are advising on privatisations and pushing bond deals, but laying low in the equity markets. Some bankers agree, for instance, that the sorry state of the Warsaw Stock Exchange - illiquid and over-regulated - has for the near term put the brakes on most stock offerings, which usually yield firms the most fees.
Debt capital markets are the most logical place for bankers to make transactions, especially because there is often a negative correlation between stock and bond market performance.
For tier-one investment banks, such as JP Morgan Chase and Deutsche Bank, this severity of the market is softened by the fact that they have close relationships with the finance ministry, a perennial issuer of investment grade bonds. This was most recently evidenced by the two firms' completion of a e1.5 billion bond for the ministry this year, one of the largest ever in central and eastern Europe, according to JP Morgan Chase's Gricuk.
While there's still competition to win a lead manager spot on ministry deals, transactions in the hundreds of millions of euro range usually allow for more than one firm to be on the cover.
"Poland on the debt side is perceived as a European Union country," Gricuk said. "It's great, as you can see many of our tombstones on the debt capital markets are for the government."
He said today JP Morgan Chase tends to complete deals with Schroeder Salomon Smith Barney and Deutsche Bank. But in the past, it also worked with both Credit Suisse First Boston and Merrill Lynch, both of which, he said, have been less visible in the country.
Privatisations are also an important component of investment banking business. As the treasury ministry has been conspicuously slow in selling off state-owned assets. The few that are slated to be partially sold, such as PKO BP, PZU and Polskie Huty Stali, have created a stir among investment bankers eager to win tenders to advise on sell-offs or to underwrite stock or bond offerings.
They even have WestLB's Gębicki's ears pricked. "On such a deal, you must be there," he said. "There's no chance to win if you are not there."
Usually last on any banker's optimistic list of business prospects are equity transactions, especially IPOs. JP Morgan Chase, for one, felt the brush-off by equity investors when it tried to float an IPO of ITI Group in July.
"We thought it was a good equity story," Gricuk said. "Unfortunately, for a variety of reasons the Polish investors were not interested."
But Gricuk said that past failures should not force potential IPOs to the side. For the WSE and investment banks to flourish, "there has to be more companies." ITI officials have tentative plans to try to tap the WSE again when the markets improve.
But Gricuk admitted that is has been difficult for most investment banks trying to float equity offerings because the WSE is not "user-friendly," and is over-regulated and illiquid.
"A number of companies would be willing but they are prohibited," he said.
