Debt Markets in Lithuania, Luxembourg, Netherlands,

Norway & PolandBy Group 6:Itisha Gupta

Shrijita BhattacharyaSaumya Bhargava

Md. RaizSaurabh Daga

Debt Market in Lithuania

Lithuanian Debt Market• In terms of size, the Lithuanian debt market exceeded that of both its Baltic

neighbours. • Domestic bond market remains fairly underdeveloped and is dominated by

government securities. • A sizable portion of total bonds outstanding are international rather than

domestic issues, i.e. Eurobonds.• Government securities dominate the market (approx. 90%), corporate debt

securities are only 6% of the total debt amount.• Government securities are issued through auction by AB NASDAQ OMX Vilnius;

registered in the Central Lithuanian Securities Depository and are denominated in euro.• Lithuania joined the euro zone on 1 January 2015.

Types of Securities Issued• Bonds:

• Government securities with maturity of over one year• The Lithuanian government borrows in the domestic market through issuance of

bonds with maturity of 3, 5, 7 and 10 years

• Treasury bills: • Government securities with maturity of under one year • Maturity of 1, 3, 6, 9 and 12 months.

• Issued by the Government in the name of the Republic of Lithuania. • Mortgage bond market:

• Is in its infancy in Lithaunia• Only one issue placed so far

• There are no municipal securities.

Effect of Debt Market on Lithuanian Economy• Lithuania’s long-term debt security interest rates in the secondary market

reached record lows, and the euro adoption is one of the main reasons that drives the growing trust of the international financial market’s participants in Lithuania.• The general direction of the market is due to the low interest environment in

the global markets; however, Lithuania’s debt security interest rates are dropping more rapidly. This reduces the interest gap between highly secure debt securities, such as Germany’s bonds. • Such changes allow us to confirm that the approaching euro adoption in

Lithuania is one of the main reasons for the drop in interest rates, because the single currency will eliminate the risk of the national currency’s devaluation and diminish the risk of the country’s insolvency, as well as the associated risk premiums.

Debt Market in Luxembourg

Luxembourg Stock Exchange• It specialises primarily in the listing of international bonds, in which it is ranked

first in Europe, with 26,684 debt securities listed on the Exchange as of 2013. • The Luxembourg Stock Exchange was the first exchange to list a Eurobond,

with the issue of Italian Autostrade bonds in 1963, and, to this day, Luxembourg has maintained a dominant position in European bond issues, with approximately 40% of all cross-border securities in Europe being listed in Luxembourg. • 70 countries list at least some of their sovereign debt in Luxembourg.• Luxembourg is also a market for debt from:

• EBRD, • European Commission, • European Investment Bank, and • World Bank.

Debt Market• An objective of the Lux SE is to develop bond trading. • Trading in these instruments accounts for 70.09% of the total volume

in 2013.• Government debt management (issuance, redemption, interest

payments, etc.) is handled by the State Treasury, which is placed under the responsibility of the Minister of the Treasury.• The Lux SE has considerable experience of listing debt securities. It

continues to diversify by responding to new market needs like Dim Sum Bonds, CoCo Bonds, indexed bonds, tier one issues, loan participation notes and Islamic bonds (Sukuks).

Types of Securities Issued• Issuers may prefer "Zero-Coupon" bonds which do not have a specific interest rate but are

redeemed to the holder with a premium.• Subordinated bonds/loans are debt instruments which are refundable after all other

loans/bonds are repaid.• Convertible bonds bear a fixed interest and can, according to certain conditions mentioned in

an offering memorandum, convert into shares.• Hybrid Debt Instruments

• These debts/loans may contain different clauses in their offering memorandum some being related to a fixed interest instrument and others being related to a shareholder's right.

• Luxembourg Companies may choose among these types of hybrid debts:• Convertible Private Equity Certificates (CPEC)• Private Equity Certificates (PEC)• Profit Participative Bonds• Warrants• Tracker Certificates• Equity loans• any other debt instruments

Debt Market in Netherlands

Dutch Debt Market• Dutch firms clearly changed their debt funding mix since the bankruptcy

of Lehman Brothers in the Fall of 2008. Firms dramatically reduced the level of bank debt and raised substantial amounts by issuing debt instruments.• Additional Tier 1 bonds (in case of default, the bank’s other creditors must

be repaid before the bond investors recoup their money - unlimited maturity), and optional coupon payments, are the fastest-growing part of the debt market for European lenders. • Issuance has soared to more than $65 billion since the market opened in

April 2013 as regulators pressure banks to hold bigger capital buffers to cover losses in the event of a crisis.

Dutch Debt Market• As the availability of bank lending has been shrinking in some countries,

mostly due to the enduring impact of the financial crisis and new regulatory requirements, corporations are increasingly turning to debt capital markets. Having said this, the extent of this trend differs substantially between the core and peripheral euro-area economies. • The reasons for this heightened attention are certainly understandable:

• investors are pouring increasing amounts into non-financial corporate bonds, • yields have come down, and • issuance volumes have been rising.

• The amount of corporate bonds issued by Dutch companies increased after the euro introduction.

Types of Securities Issued• Investment Grade Bonds:

• Debt securities issued by corporates rated BBB- or above by credit rating agencies such as Standard and Poor’s or Moody’s. These corporates are issued ratings based on their financial strength, operational past performance, and future prospects.

• Lower percentage in the 1 – 3 year and 3 – 5 year maturity buckets• Higher percentage in the longer 7 – 10 year and 10+ year.

• High Yield Bonds:• Compensate investors for the comparatively greater risk associated with investing in issuers with lower credit ratings

by offering a higher interest rate compared to other classes of bonds.• Number of companies that issue such bonds are very limited.• Maturity: 7 – 10 years.

• Convertible Bonds:• The holder can convert into a specified number of shares of common stock in the issuing company or cash of equal

value.• This type of bonds are rare in the Dutch market.• Make up only 3.6% of the global convertible market.

• Subordinated Debt:• A loan (or security) that ranks below other loans (or securities) with regard to claims on assets or earnings. • The issue of subordinated debt by the large Dutch banks has increased markedly in recent years, notably since mid-

2012.

Debt Market in Norway

DEVELOPMENT OF THE MARKET

• Since early 2000, the Norwegian corporate bond market has been transformed from a small market dominated by domestic utility enterprises into a global market characterized by large issue volumes of high yield corporate bonds. This makes Oslo Stock Exchange and Nordic Alternative Bond Market the third largest market place for HY corporate bonds in the world.

• In the same period there have been an increasing number of international issuers and international investors on the Norwegian HY market. In 2009 only 3 per cent of the listed corporate bonds came from foreign issuers. Now the latest figures shows that in 2013 the number has increased from 3 per cent to almost 50 per cent and the total NOK figure related to foreign issuers is as of 2013 approx NOK 99 billion (EURO ~ 11.5 billion).

• 2014 picked up where 2013 left off and looks set to be another record year for the Oslo Børs fixed income marketplaces. The volume of new issues so far this year is markedly higher than at the same time last year. The list of new foreign corporate issues so far this year includes Axis Offshore and energy companies such as Iona Energy, Salamander Energy and Igas Energy. The Dutch ship owner Bluewater Holding carried out the largest new issue so far this year of NOK 2.4 billion, while the Toronto-listed energy company Iona Energy carried out the second-largest placement at NOK 1.7 billion.

CORPORATE BONDS

• Both Norwegian and foreign non-financial enterprises issue bonds in the Norwegian market. While issues are denominated in both NOK and other currencies, most are in NOK. Norwegian enterprises constitute the largest issuer category. The market is characterised by a large percentage of high yield companies, including enterprises in the Norwegian oil and gas sector.

WHO ARE THE ISSUERS?

• Issuers representing capital-intensive industry such as the Shipping, Offshore and Oil & Gas industry are still the biggest players, but other sectors, such as the Food and Service Industry, Fishery, Real Estate and other industries are more and more using the HY platform for raising debt.

• Issuers of all risk classes are represented and many issuers are in the early life cycle phase with e.g assets under construction, low cash flow visibility, high leverage etc.

• Unlike electricity and water supply undertakings, which are characterised by stable cash flows and low credit risk, many of the enterprises entering the market in the mid-2000s were high yield companies. High yield companies accounted for most of the growth in 2006 and 2007 (see Chart 6). Between 2000 and 2005 high yield corporate bonds accounted for an average of 25 percent of outstanding volume in the market. Since 2007, this share has been above 50 percent.

• In 2012, issuance by enterprises with good credit ratings, so-called “investmentgrade” companies, also rose. Of the net issuance volume of NOK 50 billion in 2012, 40 percent came from investment-grade companies and 60 percent from high yield companies

CURRENCY• Up until the mid-2000s, the Norwegian market was nearly exclusively

a market in which Norwegian enterprises issued bonds in NOK. In 2006 and 2007, however, there was an increase in the outstanding volume of foreign currency bonds. Both Norwegian and foreign enterprises issued bonds in foreign currency in those years. Since then, Norwegian enterprises have had little bond issuance in foreign currency, and most outstanding foreign currency bonds are currently those issued by foreign enterprises.5 Since 2007, the share of outstanding bonds denominated in foreign currency has remained fairly stable at between 25 and 30 percent.

GROWTH

• Since 2000, the volume outstanding has almost quintupled. Average annual growth in bonds outstanding was 12 percent between 2001 and 2005, but increased to approximately 35 percent in 2006 and 2007. This corresponded to a net issuance volume of NOK 38 billion and NOK 53 billion, respectively. There were minor changes in maturities, and the high net issuance was primarily due to a marked increase in gross issuance. Between 2007 and 2011, volumes outstanding changed little. The reason is that much of the debt that fell due during the financial crisis year 2008 was not rolled over, and large maturities contributed to moderate growth in subsequent years.

• In 2012, corporate issuance activity picked up sharply. Gross volume doubled from 2011, to a record-high of NOK 97 billion. Non-financial enterprises issued a net amount of NOK 50 billion, which is over four times higher than the average of the three previous years. All together, the growth in issuance in 2006, 2007 and 2012 contributed to nearly 70 percent of the growth in outstanding volume in the period between 2000 and 2012.

Contd…• At the beginning of the 2000s, there were between 20 and 40 enterprises

that issued bonds in the Norwegian market each year. The largest issuers were utility enterprises, and most of these were electricity production enterprises. The next largest category of issuer was manufacturing enterprises. Growth in outstanding volume in the mid-2000s coincided with a sharp rise in the number of issuers. In 2006 and 2007, a total of 130 new enterprises entered the Norwegian bond market. Many of the new entrants were in sectors that had issued little in the Norwegian market previously. Much of the volume increase in 2006 and 2007 came from enterprises in the oil and gas sector (see Chart 4). Oil and gas enterprises went from accounting for 8 percent of volumes outstanding in 2005 to 32 percent in 2007.

REASONS WHY THE HIGH YIELDING CORPORATE BOND MARKET ATTRACTS INTERNATIONAL INVESTMENT

• It has a flexible and tailored structures available (such as secured and unsecured structures, project and corporate structures, optional redemption, amortisation, non-amortisation and cash sweep bond structures )

• no public rating requirements from agencies• The Norwegian HY market relies on the credit analysis prepared by the arranger’s credit research department

which also includes shadow rating . • Has a highly developed trustee system in the form of Norwegian Trustee which is the trustee of more than

95% of the bonds issued under Norwegian law and the portfolio consists of more than 1900 loan trusteeships (500 issuers) representing a nominal value of more than NOK 750 billion (EURO ~ 87.2 billion

• The documentation is simple .• The listing process process, though optional, is simple.• Arrangers with strong placing power in a mature bond market.• Good liquidity in secondary market.• Short timeline – normally 4/5 weeks for first time issuers, considerably lower for frequent issuers. • Low transaction cost compared to UK or US.

Poland

GENERAL

• Poland’s debt market has graduated from the emerging market class, is one of the largest and most liquid markets in Central and Eastern Europe.

• In Poland, the growth of lending to the non-financial sector is one of the highest in the EU (see Figure 3.1). Following a cyclical decline in the growth rate of lending – mainly due to lower demand – it has been gradually increasing since July 2013. At the end of March 2014, it amounted to 4.4% y/y.

• The driver for the Polish bond market growth comes from abroad. In 2014, the total value of instruments floating in Poland amounted to about 21.3 bln PLN. Although the market has been rapidly growing in recent years, it still considerably differs from the Western European markets, which are mainly dominated by the institutional players (investment and pension funds). Although the market has been rapidly growing in recent years, it still considerably differs from the Western European markets, which are mainly dominated by the institutional players (investment and pension funds).

Contd..• The situation on the Polish market is shaped primarily by banks, which are flotation

organizers and guarantors, as well as by enterprises, which treat corporate bond as a kind of deposit, which is almost equally safe but yields slightly higher profits. Discrepancies are also noticeable in terms of maturity – in the case of bonds issued in Western countries; they need 5-7 years, whereas they only need 3 years in Poland.

• The situation in the Polish financial market has been stable. Despite a material structural change relating to the pension system reform, there was no change in the valuation of market instruments and the turnover volumes in the period analysed, which could have represented a significant risk factor for the banking sector functioning.

• While the market is strong and stable with a promising future of a lucrative market, one major drawback is the lack of liquidity in the secondary market. To spur growth in the corporate bond market, the government last month proposed regulations to strengthen bondholder rights while the central bank announced plans to relax collateral rules for company notes at its repo transactions.

TYPES OF SECURITIES

• In Poland, Treasury bonds are the most frequently traded debt securities. Treasury debt securities are perceived as a secure and safe investment, as their buyout is guaranteed by the state, which contributes to a demand for these securities throughout the world.• Bonds may also be issued by local governments, e.g. municipalities,

administrative districts, and associations of these units. They are considered to be the second safest securities with Treasury securities leading the ranking and are usually issued under private placement.• Corporate bonds are issued by entities which carry out economic activity

and have legal personality (e.g. public limited companies and limited liability companies) under the Bonds Act.

GOVERNMENT BONDS

• The authority that issues these bonds is the National Bank of Poland (NCB). It issues debt on behalf of the ministry of finance. It also carries out open market operations using government repo as the main tool direct with banks and government bond dealers.

• The debt instruments issued by the Polish government to cover the budget deficit can be divided into two groups. The first consists of Treasury bills, short-term papers with maturities of up to 52 weeks in denominations of PLN 10,000. They are offered for sale on the domestic primary market at a discount in the American-style auction system every Monday. Secondary trading takes place in an unregulated OTC market. About 15 banks offer quotes. It is a well developed segment of the financial market in Poland, although its liquidity is declining due to the decreasing issuance of T-bills and the growing involvement of non-banking institutions that hold them to maturity. The second group of debt instruments comprises Treasury bonds, long-term papers with maturity of up to 10 years, which come in various types

• The first Eurobond was issued in July 1995, denominated in 1995.• The Act of 29 June 1995 on Bonds has formally launched the development of a market for municipal

bonds in Poland. The changes not only affected the legal provisions, but also the attitudes of self-government activists and institutions engaged in the issue of municipal bonds.

CORPORATE BONDS• The corporate bond market is relatively ne in Poland. The yield on corporate bonds is calculated in relation to the

issuer’s insolvency risk. In Poland, the issue of corporate bonds is a less popular form of obtaining foreign capital as compared with bank loans.

• One reason for this is the poor knowledge of the debt securities market on the part of potential issuers, issue-related costs and the need to improve company transparency. A broad variety of safer Treasury bonds may also contribute to limiting the development of this market segment. At the same time, bonds are gaining in significance among debt securities and it is likely that this market segment will be developing dynamically in the future.

• Various types of financial institutions, such as: banks, international financial institutions, and central banks may also issue bonds. Among bonds that are most frequently found in the market are bank bonds. Polish banks rarely use bonds to finance their activity; they usually allocate proceeds from the issue to increase lending.

• Excluding banks, Polish companies sold a record 12.8 billion zloty of debt in 2012, boosting the total outstanding by 31 percent to a record 31.4 billion zloty in December, according to Fitch Ratings data. That compares with 270.4 billion zloty of corporate loans on April 30, the latest central bank data show.

• Multimedia Polska SA sold 1.04 billion zloty of seven-year notes on May 10 in the biggest issue ever by a private Polish company in local currency. Banks bought 46 percent of the bonds, while pension and mutual funds purchased 45 percent, Chief Executive Officer Andrzej Rogowski said by phone on May 14.

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