The Vienna Stock Exchange was founded in 1771, during the reign of Empress Maria Theresa. Initially launched as a market for state-issued bonds – only bonds, bills of exchange, and foreign currencies could be traded – it expanded rapidly. In 1818, the Austrian central bank – which had itself been founded only two years earlier – became the first joint-stock company to be listed on the exchange (and one of the first shareholders was Ludwig van Beethoven, who bought eight shares in 1819). In 1863, the Suez Canal Company had become the first foreign company to be listed on the Vienna Stock Exchange, and in 1865, there was a further foreign listing with premium bonds issued to fund Turkish railway lines (“Turkenlose”). When the Frankfurter Bankverein applied for a listing of the Turkenlose bonds on the VSE, the Exchange Chamber decided to introduce rules for the admission of foreign securities, and thus, in 1873, the “Italian bond” became the first official foreign listing by means of a formal application. In December 1997, the Vienna Stock Exchange Chamber was merged with the Austrian Futures and Options Exchange to form a new exchange operating company, Wiener Borse AG, and in subsequent years the business spectrum of the Vienna Stock Exchange broadened to include market data dissemination and index calculation as well as IT services and central securities depository services.
Now, on the occasion of its 250th anniversary, the Vienna Stock Exchange, which is owned by Austrian banking institutions and listed companies, also owns and operates the Prague Stock Exchange and lends market infrastructure to the stock exchanges of Budapest, Ljubljana, and Zagreb. Next to the Deutsche Borse Nasdaq and the ever-growing Euronext, it is perhaps the most prominent exchange in Europe.
The VSE has a market capitalization of EUR 108.18 billion, with 88 trading members (including 62 from outside Austria), and it is a market data hub for the Vienna, Albania, Banja Luka, Belgrade, Budapest, Kazakhstan, Ljubljana, North Macedonia, Prague, and Zagreb stock exchanges, as well as the EXAA Energy Exchange Austria, collecting and distributing data from these sources to market data clients. The VSE composition is 42% financials, 30% basic industries, 12% industrial goods and service, 11% utilities, 3% technology and telecom, and 1% consumer products.
And business – despite the pandemic – is good. Austria’s capital market capitalization of 2020 was higher than it was in 2018, and equity turnover in Austria grew by 11% in comparison to 2019. “The decline in valuations that followed March of 2020 was balanced by a very strong catch-up in third and fourth quarters,” says Vienna Stock Exchange CEO Christoph Boschan. “We can’t complain a whole lot. Year-on-year, the Austrian Traded Index doubled since hitting a low in March last year, when global stock markets plummeted. According to analysts, cyclical stocks saw a strong comeback with the rollout of the vaccine.”
Stocks and Bonds
Schoenherr Partner Christoph Moser avoids grandiose language, describing the Vienna Stock Exchange as “a niche, small market,” and reporting that, “it has not, unfortunately, mirrored the strong developments of the IPO markets in the US, UK, or Germany.” Moser says that the market was somewhat silent from 2011 to 2018/2019, with just a few “IPOs and other equity issuances, with some de-listings and demergers leading the pack.” Still, he says, “in 2019, we saw some IPOs in Vienna, like Marinomed Biotech and Frequentis, that indicated an upwards trend in equity capital markets.” Moser says that this was set to be the case for 2020, with some equity projects in the pipeline, but the market ebbed in early spring with the onset of the pandemic.
“Traditionally, Austria never really had strong activity in equity capital markets, due to a lack of eligible issuers,” agrees Wolf Theiss Partner Claus Schneider, and he notes that “there were no notable new issuances and very few capital increases last year.” Still, he points to another source of activity at the VSE. “During the pandemic, we saw a nice number of bond issuances taking place, but no new debt issues, rather roll-overs and re-financings due to low interest rates, particularly by real estate companies, and banks that needed to build up certain forms of capital and eligible liabilities in large sizes.”
Indeed, the VSE claims to be the fastest-growing stock exchange in Europe in terms of listed bonds, and a strong competitor to the exchanges in Luxembourg and Dublin. “We have invested in promoting debt activities and have launched a bond listing initiative as part of our overall strategy,” says Christoph Boschan, referring to a program that started in 2018. “I believe we are more and more becoming an EU center for debt listing of any kind, not just for those with instruments that are intended to be traded internationally, but also for those seeking a listing for regulatory or compliance reasons.”
Moser agrees that debt capital markets have played a large role in Austria in recent years. “Last May, June, and July saw corporate bonds still playing an important role – with a higher risk premium for sure, but working smoothly.” He says that investor demand for corporate bonds remained strong, even as uncertainty on the equity side saw share prices plunging. “After the initial shock, it was like the debt market kept speeding up back to its pre-pandemic pace,” he says. “Some companies raised huge amounts of money.” OMV’s raising of a combined EUR 4.5 billion via three senior unsecured and hybrid bond issuances in 2020 is an example. “The debt market is still robust and solid,” he says, “and I see no reason for it to slow down, especially on the corporate side.”
The situation is a bit different for financial institutions, Moser says. “Several banks usually refinance parts of their business with mortgage covered bonds,” he says, “but there is so much cheap money that banks can access via the central bank that some banks have no need to access capital markets.” He cites this ease of access as the reason for less mortgage-covered bond activity in the second to fourth quarter of 2020, but he says that this could change, if “the central banks decide to turn off the tap, should they deem it prudent, in an effort to conserve funds.”
Preparing for Post-Covid
“In the history of world economies … it is a given that those economies with developed financial markets have recovered faster, have shown higher growth rates, and have developed more sustainably,” says Christoph Boschan. “We at the exchange firmly believe that Austrian capital markets will remain strong. A year and a half ago, the government confirmed its desire to foster capital market growth via the introduction of tax relief for investors that hold their investments for a certain period of time.” Once it becomes law, he says, the incentive will make stock investments more attractive.
In the meantime, listed companies in some industries have been hit harder by the pandemic than others. “For example,” Claus Schneider says, “the European Central Bank – and in its wake the Austrian Financial Markets Authority – has issued a ‘recommendation’ that credit institutions be restricted from making dividend distributions as a response to the pandemic, which has made their shares less attractive – especially as banks reported nice profits, which they could not pay out to their shareholders for the time being.” In some other industries as well, Schneider reports, there were dividend restrictions or governmental efforts to discourage companies from paying large dividends. Still, he says, “I firmly believe that there very well might be a ‘catch-up’ effect once the pandemic is over,” with profit reserves quickly distributed to shareholders. In addition, he says, “one thing I could imagine happening after the pandemic is capital increases by companies that are in trouble as a consequence of the crisis, due to a need to fill up equity cushions and restart their business.”
Moser agrees that, heading into 2022, there should be more equity transactions in the field. “We expect to see a trend for equity financing for corporates,” he says, “especially those that suffered due to the pandemic, in order to reduce their gearing and to finance future growth projects.” Moser believes that Austria has several hidden champions – successful companies operating out of the spotlight – that investors would be interested in. According to him, many successful Austrian companies are family-owned or with concentrated private shareholders, who see no value, at the moment, in going public. “There is no reason to go to the market if you can strike a deal with just a few people – it’s faster and more cost-effective,” he says. Still, he notes, “if there were a tax incentive for public equity investments in place, or another sort of a regulatory nudge to stimulate an IPO – this might change the landscape.” According to him, “to have a more mature equity market, you have to start with the companies themselves and give them an attractive incentive to go public.”
One way or another, he says, “we may expect to see some IPO activity in the near future – a solid two or three this year or in early 2022.” According to him, “if capital markets remain solid, and current trends are not disrupted, I think that private equity exits will play a role in IPOs this year and in 2022.”
Boschan notes that more capital flowing in from individual investors would spur the economy. “Activating private capital is possible, which would definitely help the public budget,” he says. “The capital is there, it’s just a matter of tapping into it, and the current government agrees – which is why they are endeavoring to increase financial literacy and incentivize private entrepreneurship even more.” In the meantime, he says, it is up to the VSE to make sure that all and any investors, including those from outside the country, “feel no hurdles when doing business in Austria – there must be no local obstructions that would slow capital down.” And he seconds the call for governmental action. “What is lagging now is that specific measures need to be implemented. COVID-19 has slowed legislative efforts down – but this is the case everywhere in Europe,” he says. “The government ought to implement bold and broad measures and to follow up on its stance that capital markets should be developed. And the current coalition included strong measures in their government program, like fostering financial literacy and lifting the capital gains tax for investment holding periods of over one year.” According to him, “swift implementation would promote the local capital market.”
Ultimately, Schneider says, the Vienna Stock Exchange has developed remarkably in recent years, and both its equity and debt markets will continue to grow. “It may never be the size of, or compete with, Frankfurt or Paris,” he says, “but it is for sure to remain a key player in its extended home markets.”
If past is prologue, after 250 years, you can put your money on that.
This Article was originally published in Issue 8.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
