The systemically important sectors of the economy, such as the energy and utilities sectors are, should be listed on the stock market, says Ludwik Sobolewski, CEO of the Bucharest Stock Exchange. The main reason is that, with large floatings, such companies will support the correct development of another systemically and structurally important segment in the country, which is the second pillar of the social security system. In Ludwik Sobolewski’s view, it is indeed of highest importance for Romania to enhance the supply of investable assets for the pension funds. The energy stock is one of the naturally best assets for the allocation of the pension system funds – because of the large market capitalization and the low volatility of pricing in long term.

Esteemed Mr. Ludwik Sobolewski, energy is the leading sector in terms of liquidity for the BVB. Please tell us what are the advantages for the large energy companies of being listed on a stock market, in particular on the Romanian stock market.

I agree, that this is a “leading” sector” on the BVB, but we should remember that among the top 4 companies that are “business card” in our efforts to become a new emerging market we have two companies from this sector (Romgaz and Petrom) and two financial institutions (BRD and Banca Transilvania).

Large companies from the energy sectors indeed form a specific category both in the economy and on the stock market. It derives from the fact that they are usually strategically important for the local economies, as elements of the national infrastructure. In addition – but of course it is one of the consequences of their vital infrastructural role – they function in a heavily regulated industry. This industry engages issues such as consumers’ protection and fair competition, and the diverse mission, linking public and private interests.

Those observations make me think that the rationale for such companies to be public companies is twofold. Certainly, for a company to be listed means to be an entity that may benefit from the accessibility to local and international financial markets, which gives to them a possibility to get funds through bonds or equities. Moreover, the listing on the stock exchange normally allows to reduce the cost of financing by way of such instruments, because investors profit from liquidity of the market venues trading such instruments. And we all know how capital intensive is the business of largest companies active in that sector, and how important is the systematic modernization of the infrastructure. It is then the question of the mitigation of risk and optimal development, to have this avenue for fundraising on a stand-by.

But state policy may – and in some countries of our region does – push those companies to be listed, not only for the financial reasons. It is simply safer if such strongly regulated heavyweights are listed, because it puts them under the control of the public market, increasing the transparency and reducing the risks of the distorsion of competition. In that regard the tendency to get such companies listed resembles a policy to get listed the banks, which are another extremely important segment of the infrastructure, and a strictly regulated one.

There are still some energy companies that might enter the stock market, and Hidroelectrica is the first in line. How important is for a company like Hidroelectrica to enter the stock market?

Everything which I said so far does apply to Hidroelectrica as well. In this case it could be added that for large companies in the phase of stable development, which can grow by acquisitions, having shares traded on the stock exchange positions a company in an optimal manner in the market. Shares with liquidity inherent to the marketplace is a tool to carry out M&A transactions, in order to  take over other companies and to enlarge the business in this way, at reduced cost of acquisition (which may be entirely a non-cash cost).  Besides, being a highly dividend-stock company – and certainly Hidrolectrica is likely to remain as such after the listing – will give to this company a special status in the eyes of future investors. In addition, for a big company as Hidroelectrica, it is particularly important to improve efficiency. The public market helps the management to constantly keep going in this direction.

Is there a better moment for a energy company to proceed to an IPO? We all know the current context – with oil prices depressed for some years now – which tends to put some downward pressure to all energy sectors. What are the main issues the owner – the Romanian state – should take into consideration where listing a large energy company like Hidroelectrica?

The current market situation is always important, but Hidroelectrica, and other companies representing the energy generation sector, enjoy of a specific perception of the investors. They are widely considered as “defensive businesses” and investments. It means that these businesses normally do not offer spectacular rise of the valuations (via prices of the shares), but they are anti-cyclical, as part of the infrastructure. They “sell” regardless of general state of the economy at a given moment. This is even more deeply embedded by classical utilities, such as gas and oil grids (Transeletrica, Transgaz). They are also very often relatively resisting to shocks and turbulences on the markets. And these are the attributes you “sell” to investors when doing an IPOs of such companies. The dividend yields are also obviously weighing on the decisions of investors at IPO phase.

The objective of BVB is reaching the status of the emerging market in the Morgan Stanley Capital International index (MSCI). How close are you achieving this objective?

Global investors acknowledge that a certain market is an emerging market, if a sufficient number of companies with a very large market capitalization and free float are among the assets listed on a local stock exchange. As long as Romanian state does not send Hidroelectrica to the market, Romania will have very little chances to be treated and classified as emerging market, in short to medium term.

The Romanian market has undergone profound changes, and now it is one of the most dynamic capital markets in Eastern Europe. It was noticed by regional and global investors, as well as by financial institutions intermediating in the flows of capital. It was reflected in the decision of FTSE Russel, which placed Romanian market for equities and BVB on the so called emerging markets Watchlist. It practically means we have now real chances to become, formally speaking, an emerging market. This formal status will bring significant benefits for the domestic investors and entrepreneurs, and for the Romanian economy at large. However, it must be stressed-out, that this goal is hardly achievable if the Romanian government does not make a decisive step in this direction. As I said, the return will consist of benefits not only for the intensity of the capital flows, but it will result in better valuations of the companies listed on BVB – in which Romanian state remains, in many cases, the largest shareholder, and in the improved perception of Romania, engendering  positive effects in a number of fields.

One of the main reasons for a company to enter the stock market is to access convenient financing. Would you say this is the case with the energy companies listed on BVB?

Those companies do not recently use the capital market for financing – which is dictated by their strategies, capital investments needed and also by the fact that they are highly cash generating businesses. However, these parameters are always subject to change. It is reasonable to be well prepared.

Inevitable, large companies attract all the attention. But there are also numerous small and medium-sized enterprises in the Romanian energy industry. What has the BVB to offer for this kind of companies?

The Bucharest Stock Exchange ensures a visibility of all companies, which is especially pertinent for medium size and smaller enterprises. And any business, including the one operating in the energy sector, can gain a lot on a good visibility and brand recognition by business partners and customers.

Smaller companies very often have a problem to finance their activity by credit, because for the banks they do not have enough of the equity capital and do not pass the criteria of the systems assessing the credit worthiness. Here of course the capital market may be an essential instrument ensuring the adequate capitalization of the company, by fundraising. Besides, for a small or medium size company which may be in the stage of the dynamic growth, the shares of the company, if they are traded, may be used as a “currency” in various transactions, reducing the transactional costs – for example in M&As, as I mentioned before.

However, the number of the companies suitable for the stock market is limited. What progress are you making in promoting the growth of bond markets and derivatives instruments, as additional instruments for the already listed companies?

I wouldn’t say that corporate bonds are instruments that might be somehow opposed to the situation when the shares of a company are listed. Of course, bonds may be listed and traded on the stock exchange, whereas the issuer – the company – is not listed via equities, so in the technical sense the company is not a public company. But in modern markets we see very often that a company decides to be listed through shares and to tap the financial market via both equities and bonds. One of the main arguments for such a strategy is that transparency which is a consequence of the fact that the issuer is listed, improves the risk profile of the issuer as an entity issuing bonds and leads to the reduction of the market cost of debt.

Therefore, if a company is listed, it arranges by itself good conditions for the issuance of tradeable debt instruments. From the investors’ perspective – the bondholders – who value highly the safety of investment – it is an attractive situation because the investor receives two premiums: a transparency premium (highest transparency accompanying the listing of the issuer through shares) and liquidity premium (possibility to close the position in bonds in the secondary market). These factors allow the issuer to offer a bit lower yields, that is to pay less for the financing received or, in some cases, is a necessary condition for the success of the offering, notably as regards the so called “high yield” bonds of issuer with increased credit risk.

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The full version of this article can be read in printed edition of energynomics.ro Magazine, issued in December 2016.

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