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Regulatory Changes to the Hungarian Bond Market

The Hungarian Parliament adopted several amendments to the Hungarian capital markets act, effective as of December 27, 2019, in order to adhere to the relevant rules of the European Union and also to make it easier for Hungarian companies to issue bonds by introducing more lenient information and publication rules for such issuances.

Dr. Gergely Szalóki, Partner, Schoenherr Hetényi Attorneys at Law

Changes Introduced

The definition and rules of public placements have been harmonized with the relevant EU regulation and although this results in the wider scope thereof, the exemption from the requirement of submitting a prospectus has also become wider. In the same vein, registering the securities to a multilateral trading platform will no longer automatically result in a public placement. This also means that no prospectus will be required in case the bonds are introduced to the XBond trading platform operated by Hungarian Stock Exchange; a simple information memorandum is sufficient.

XBond Trading Experience

Bonds issued under the Hungarian National Bank’s (MNB) Bond Funding for Growth Scheme (BGS) must be introduced to a trading platform. To meet this requirement, on July 1, 2019 the Hungarian Stock Exchange launched the XBond trading platform, open only to eligible issuers and investors, where bonds may be traded without the need for a prospectus. After half a year of experience, the Hungarian Stock Exchange fine-tuned the terms and conditions of the XBond trading platform by further simplifying the pricing and offer process, to make it more convenient for market players to use.

Revised BGS Terms and Conditions

The MNB launched the BGS on July 1, 2019, aiming to encourage Hungarian corporations to rely on other financing forms than bank loans by providing liquidity on the bond market. The MNB purchases 50% of the bonds with an eligible rating issued by non-financial corporations, initially up to the aggregate amount of HUF 300 billion (approximately EUR 90 million). The MNB purchases the bonds under market value and may purchase a further 20% on the secondary market at market value (i.e. the aggregate stake of the MNB may reach 70%).

Recently, the MNB reconsidered the terms and conditions of the BGS and introduced new T&Cs for issuing companies applicable as of January 1, 2020. The most relevant change is that the MNB increased its initial budget from HUF 300 bln to HUF 450 bln (approximately EUR 136 mln).

Pursuant to the new rules, if a bond rating falls below “B+”, the issuer may not procure another credit rating to try to reenter the BGS (in accordance with the principles applied by the Basel Committee on Banking Supervision, i.e. the worst credit rating should apply). In addition, the issuer is liable for the authenticity of the information and data disclosed to the credit rating agency, including its business plan projecting the purpose of the (successful) bond issuance. The issuer must also undertake in the information memorandum/prospectus that the funds raised by the issuance will be used to finance the purpose projected in the business plan.

As of February 1, 2020, the MNB harmonized the terms and conditions of the BGS with the relevant EU regulation considering the definition and rules of public placement.

BGS Impact

Recent statistics show that the BGS has already had an impact on the Hungarian bond market. The value of the bonds issued last year increased by HUF 235 bln (approximately EUR 71 mln) in the second half of 2019 and most were issued under the BGS. Approximately 60% of these bonds have been subscribed by the MNB. Considering that the central bank increased the budget of the BGS, we expect this growing tendency will continue in 2020.

Dr. Virág Pagluta, Associate, Schoenherr Hetényi Attorneys at Law