The investment volume curve concerning Serbia’s capital markets and trading on the Belgrade Stock Exchange is on a downward trajectory as of the end of the second round of mass privatizations and the start of the 2008-2009 economic crisis.
Even at its peak, Serbia’s capital market and trading volumes were rather underdeveloped and insignificant in comparison to the ones in the EU.
In order to U-turn the current situation, the Ministry of Finance, together with the World Bank, has started the Catalyzing Long Term Finance Through Capital Markets Project (Project). The World Bank granted a EUR 27.7 million loan to support Serbia in developing its corporate bond market and enhancing the participation of the private sector in financing investments.
The Project, which started this year and is intended to be in place for three years, aims to facilitate the issuance of bonds solely by privately-owned Serbian companies with a positive financial track record in recent years.
On the Project
The three main phases of the Project are the following: Phase 1 – application by the interested issuer and confirmation of its eligibility by both the ministry and the World Bank; Phase 2 – due diligence over the issuer by both legal and financial experts proposed by the issuer (legal and financial experts are to be selected by the issuer from the list of experts that qualified under the Project – MMD Advokati being one of the chosen legal experts); and Phase 3 – preparatory actions for and issuance of bonds.
Other key details include:
Interest – to be determined at a later stage and will differ from issuer to issuer. The interest is initially set by the issuer themselves together with the financial advisor, but it can be adjusted depending on the situation of the market.
Bond issuance – there is no strict minimum or maximum amount of bond issuances per issuer, however, some EUR 3 million are considered the lowest acceptable bond issuance.
Bond type – there are no restrictions. Bonds may be plain vanilla, green, coupon, thematic, etc.
On Issuers
So far, the response and interest of issuers is at an enviable level. This is rather expected as this allows issuers to avoid banks’ financing. At the same time, the criteria and conditions of the Project are rather flexible and favorable for potential issuers. As an example, the issuer has no obligation to have a specific purpose/project for which bonds are issued (although it is recommendable as this will ease attracting investors). At the same time, the entire cost of legal and financial due diligence and of the credit rating agency is covered by the ministry. The only cost to be borne by the issuer is 20-25% of the amount and expenses in the issuance process itself if the issuance is successful, though even this cost does not apply if the issuer is fully owned by women. Furthermore, the issuers see entry in the Project as a step closer to an eventual IPO.
The first issuance of bonds under the Project is expected at the very beginning of 2025 and the first issuer is expected to be one of the largest and most reputable privately-owned companies in Serbia.
On Investors
The ministry will fully support eligible issuers and will organize roadshows in Serbia and the region in order to present the Project and attract both domestic and foreign investors (like the EBRD and other IFIs).
In the process of attracting investors, the ministry is considering further tax incentives which would make the whole scheme even more attractive.
Outcome Prediction
This may not be the first attempt of the Serbian government to change the climate of the capital market and make it attractive but it is certainly the most serious and dedicated one. The initial conditions – the full backing of the World Bank and a positive climate on the worldwide capital markets – are met. Thus, the success remains dependable only on the sufficient number of reputable issuers and, later on, the full coverage of issued bonds by credible investors.
Ultimately, the success will highly depend on the outcome of the first couple of bond issuances under the Project. If these go well and smoothly and the emissions are looted, this will be a boost for other reputable companies to join the Project and the spiral of success would be in place.
By Rastko Malisic, Partner, MMD Advokati
This article was originally published in Issue 11.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
