The National Bank of Hungary (MNB) is launching a new bond program next month with the aim of boosting and diversifying corporate fund raising.
Starting on July 1, a new mortgage bond program by the MNB is set to stir the still waters of non-bank financing in Hungary. The program, christened the Bond Funding for Growth Scheme (BGS), is in a way the successor of the Funding for Growth Scheme (FGS), a program that MNB launched in June, 2013, to restore corporate lending to pre-recession levels.
FGS targeted mostly small- and medium-sized enterprises, as it were these that suffered most in the credit crunch. As a result of the roughly 5% annual decline for almost five years, by the beginning of 2013, corporate loans outstanding had shrank to 75% of the pre-crisis level, according to data by MNB.
The program helped contribute to reversing the downward trend: by 2018, the annual growth rate of SME lending was around 12%, MNB statistics show. But while the volume of corporate lending has returned to a more adequate level, corporate financing is still based on one pillar: bank loans. At the end of 2018, the bank loans of non-financial corporations as a percentage of GDP exceeded 17%, however, their bond portfolio amounted to only about 1.5%.
By comparison, in 2018 Q4, the ratio of bonds in corporate financing stood at 11% in the eurozone, 18% in France, 22% in the United Kingdom and 10% in Germany, according to data from the EU’s statistical body Eurostat.
Hungary doesn’t only lag behind Western Europe, however; it also fares badly in regional comparison. Only Romania is worse off with 0% of bond volume, other countries such as Czech Republic (7%), Poland (5.3%), Slovenia (2.1%) and Slovakia (2.7%) are all well ahead.
To improve the structure of corporate lending, MNB announced the introduction of the new program at the beginning of this year.
Supporting the diversification of corporate fund raising has several advantages. A bond market can create competition for bank loans, leading to a fall in funding costs. A liquid bond market contributes to improving the efficiency of monetary policy transmission, while healthy competition between markets providing funds for companies may render the central bank’s interest rate decisions more effective, MNB says.
In addition, a sufficiently liquid, advanced bond market may increase financial stability and also mitigate the effects of any potential economic crisis.
To support the creation of such a market, MNB will launch the program on July 1. Within the scope of the scheme, the central bank will purchase bonds with good ratings issued by non-financial corporations as well as securities backed by corporate loans from a HUF 300 billion funding pool.
The number of potential issuers interested in the program is around one hundred. MNB says it is already in talks with many of the companies, and the rating process has also started, market insiders say.
Among the main criteria are a company’s cash flow, its sectorial prospects and refinancing ability. Volume is another consideration; companies that are only able to issue low volume bonds may not be interesting for institutional investors, Ágnes Svoób, head of corporate finance at Equilor Investment Zrt. told reporters at an event on MNB’s new program.
Large firms with at least HUF 1 bln debt volume, with good sectorial prospects and low refinancing risks are the most likely participants of the program, according to Equilor. Companies from a wide cross section, from the food industry to manufacturing to production, are all highly interested in the program, Svoób noted. Most of them would use the funds to invest, but foreign acquisition is also on the list of potential uses.
In terms of cost, bond issuance is not supposed to significantly exceed the cost of borrowing. For a bond issuance of HUF 10 bln-15 bln, the costs would be 20-30 basis points, Equilor calculates. Those interested typically think of HUF 10 bln bond issuance, which means that around 20-30 companies may participate in the program, Equilor notes.
The process may take as long as three or four months, of which rating may last as much as eight weeks. The costs of rating are financed by the MNB. The cost of the credit rating itself is put at nearly HUF 15 million, and there is also an annual maintenance cost of HUF 6 million–7 mln, again MNB financed. Issuers must have at least B+ rating to issue bonds.
Hungary’s bond purchase program in is not entirely new. In 2015, for fear of deflation, the European Central Bank started its so-called quantitative easing program to hold down interest rates and encourage lending. During the bond-buying program, which ended last year, the ECB bought up mostly government but also corporate debt, asset-backed securities and covered bonds and it pumped EUR 2.5 trillion into the market.