Capital Market

Investor trust down after tussle between FNM and Czech company
Mystery shares
Secondary bond market illiquid

Investor trust down after tussle between FNM and Czech company

The Bratislava Stock Exchange floor market continued its somnolent mood during July and the beginning of August, with only moderate changes in share prices. Trading volumes were thin and market statistics were inflated by FNM privatization transfers and OTC trades. The SAX stock market index reached a year-low of 164.81 on 22 July. VSŽ was the most liquid share and increasing demand for this share increased its price to Sk650. Slovnaft firmed at Sk860.

VÚB Kupón share transfers prior to the fund's July EGM resulted from a change in its ownership structure. New owners were buying large stakes in the fund at a price of Sk950 per share, a 13.8% discount to the fund's NAV per share. Commercial bank Všeobecná Úverová Banka (VÚB) sold its 10% stake in VÚB Kupón and two new shareholders emerged, with stockbroker Penta Brokers and an unknown company, AKS, now holding a combined at least 20% share. The fund's shareholders decided to rename the company the Strategia-Invest investment fund during its EGM. Strategia-Invest will focus on strategic investment into companies. Uncertainty about the fund's future has caused a slump in its price below Sk200 per share.

Mystery shares

Investor trust in the Slovak market decreased after 11 July, when the Czech company Inekon found out that 2% and 8% stakes in a company called NCHZ had mysteriously disappeared from its account in the Securities Clearing Center (SCP). The missing stake most likely was the result of the exercising of collateral rights for the shares, which the privatization agency FNM had held and subsequently transferred to another entity. According to Karol Danys, director of the FNM's capital markets department, Inekon failed to fulfill its privatization contract, since it had not paid the purchase price, and Inekon's level of investment in NCHZ had failed to reach the agreed upon amount. Inkeom's director, Josef Husek, disputed the FNM, saying his company fulfilled all the conditions. As a result, Inekon owns 41% of NCHZ, less than the majority stake it previously held. Husek said Inekon would probably withdraw from the chemical company.

If that happens, we expect that a certain stake will be sold to company employees. However, it is questionable how NCHZ's new owners will find the approximately one billion Sk necessary for investments in the partially outdated company.

Large stakes in the railway carriage producer Tatravagonka were transferred via the OTC market, and a 18.95% stake was bought by the brokerage company Bradloinvest and then by the brokerage company Enter Slovakia. Simultaneously, the FNM decreased its share in Tatravagonka from 46% to 10.63%. Vapop owns a 51% stake in Tatravagonka.

Among OTC trades, the transfer of an almost 30% stake in the petrol retailer Benzinol, sold by Slovenská Sporiteľňa (SLSP) to the unknown company Slovbena at a price of Sk505 per share, dominated trading activity. SLSP acquired a 34% stake in Benzinol last December from the FNM at a price of Sk500 per share, the stake probably bought with FNM privatization bonds. The 12% stake in Benzinol was acquired by the company Bena Trade from the FNM this May.

According to securities traders, in Slovakia, it is technically possible to transfer shares from an SCP account without the permission of the owner of the shares due to legal gaps.

Secondary bond market illiquid

The secondary bond market is experiencing almost a complete lack of liquidity. Turnover fell to Sk1.2bn ($35.3m) in July, from Sk9.5bn in June and Sk10.7bn in May. The few trades which were executed had inconsistent pricing, although it is difficult to ascertain what the market prices should be. Taking in consideration the T-bond yield curve, which is in a range of 16%-18%, the best quality corporate bonds should yield around 20%.

There were reports last week that the Ministry of Finance an amendment to the income tax law. In it, the ministry proposes to levy a 15% tax on interest yields on state securities (i.e. T-bills and T-bonds), which were not taxed before. While this would level the tax burden with other fixed-income securities, the amount of money which will be collected from the tax would have to be paid to investors in the form of higher yields. This creates an extra 15% yield pick-up and makes state securities more attractive for foreign investors, who are prevented by double taxation treaty and do not pay withholding tax in Slovakia. The problem is that the ministry proposes to levy the tax on outstanding T-bonds as well, which would cause the price of these bonds to drop dramatically. Such a change of rules would distort the investment environment and reduce demand, which would again increase the government's refinancing costs, a result which is exactly the opposite of the ministry's intentions.

Prepared by ING Bank N.V., Bratislava branch in cooperation with ING Baring Securities (Slovakia), o.c.p.,a.s.

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