THE CEO OF THE WARSAW STOCK EXCHANGE, IN A VISIT TO BUCHAREST The Poles are coming for the Proprietatea Fund?

• The key question: What will happen to the liquidity of the BSE after the Proprietatea Fund gets listed in Warsaw?

• Huge differences between the two exchanges: the capitalization of the BSE - 16.6 billion Euros; the Warsaw Stock Exchange - 150 billion Euros

The secondary listing of the Proprietatea Fund on the Warsaw Stock Exchange is a burning wish, not only of the shareholders of the Proprietatea Fund - who approved it in the General Shareholder Meeting - but apparently, for the Polish officials as well. This week, they will come to Bucharest once again, to talk to he heads of the BSE, and the issue of the dual listing is so important, that it is unlikely it won't be debated.

After promoting the listing of Romanian companies on the Warsaw Stock Exchange in February (through Marek Szczygiel, the Polish ambassador in Romania, through Lydia Adamska, a member on the Board of the Warsaw Stock Exchange, and through Pawel Tamborski, subsecretary of state in charge of overseeing the privatization process through the Polish Stock Exchange), Ludwik Sobolewski, the CEO of the Warsaw Stock Exchange will be coming to Bucharest this week, to talk to the officials of the local stock market.

He has visited Romania before, when the spot market was inaugurated in Sibiu, (January 2010), and he was planning dual listings in Warsaw and Sibiu. However, those projects never yielded any concrete results.

On the local market - both in the case of brokers, as well as officials - there is a concern that once the Proprietatea Fund gets listed in Warsaw, the most liquid issuer of the BSE will see its liquidity migrate to Poland.

In February, the Poles said that this concern was unwarranted, because liquidity returns to the local market after a while.

"Initially, the greater liquidity is transferred to the second market, but in the end it returns to the parent market, as even foreign investors prefer to work with the local brokers, because they have better access to information", said Pawel Tamborski, subsecretary of state in charge of overseeing the privatization process through the Polish Stock Exchange, on February 16th, at a forum in Bucharest.

Grzegorz Konieczny, the manager of the Proprietatea Fund, reprised that idea whenever he had the opportunity. On the occasion of the General Shareholder Meeting which took place last month (when the terms of the listing in Warsaw were approved), he said that the operation depends exclusively on the connection between the Central Depository and the KPDW, its Polish counterpart.

As a matter of fact, the Poles have also considered the idea of an indirect connection with Bucharest, through a custodian bank.

The BSE officials have also avoided publicly expressing their "feelings" concerning the trading of the Proprietatea Fund in Poland, as the standard answer to the questions of journalists was "No comment!"

The question which remains is whether the scenario in which liquidity returns to the domestic market, which the Poles presented, will apply in this particular case, given the huge differences between the two markets and how the BSE will position itself in this competition (Read the brokers' opinions in the insert).

This year, the average daily turnover on the BSE was 7.5 million Euros, and its capitalization was 16.6 billion Euros, of which the Proprietatea Fund accounts for approximately 1.4 billion Euros, according to the data on the BSE website.

For comparison, the Polish stock Exchange has a capitalization of approximately 629.3 billion zlotys (approximately 150 billion Euros), and the average daily turnover wass 722 million zlotys this year (172 million Euros).

The Warsaw Stock Exchange (WSE) is the first in Europe compared to the number of IPOs taking place in the second quarter of this year and the third in Europe in terms of their value, according to the most recent report by "PricewaterhouseCoopers" (PWC) on the number and value of IPOs which took place on the main stock markets in Europe.

• The plan to get the Proprietatea Fund listed on the Warsaw Stock Exchange

The technical listing of the Proprietatea Fund in Warsaw will be made based on a memorandum of information and will not require the approval of any other regulator institution, as the Proprietatea Fund was present on the Bucharest Stock Exchange for more than 18 months, according to the manager of the Proprietatea Fund.

The consortium which will intermediate the technical listing on the Warsaw Stock Exchange will include JP Morgan, UniCredit Group and KBC Securities.

The second stage of the listing will consist of ensuring the liquidity on the new market, through private placement.

The secondary listing will make the Fund more visible and more easily accessible for the targeted investors, which include the Polish mutual and pension funds, as well as the international investors dedicated to the region and the benchmark investors which are active in Romania, according to FT.

The shareholders of the Proprietatea Fund have approved the budget for the listing on the Warsaw Stock Exchange, worth a total of 10.7 million lei (2.4 million Euros), with half of that amount to go to the consortium comprising JP Morgan, UniCredit Group and KBC Securities which will intermediate the operation.

The three intermediaries will earn 5.4 million lei, and the legal fees are estimated at 2.2 million lei, according to the budget for the listing drafted by Franklin Templeton. The listing on the Poland stock market had already received the on principle approval in a General Shareholder Meeting in the beginning of April.

• • Ovidiu Fer, Wood&Co: the BSE needs to review the opening of the market

Ovidiu Fer, broker at Wood&Company of the Czech Republic, considers that the listing of the Proprietatea Fund (ed. note: in Warsaw) is a positive thing "if we look at the big picture" and we have a medium and long term outlook.

"Attracting the interest of a new category of investors is definitely a beneficial thing", he said, and he went on to say: "Of course, on the first days there will be a few important trades on the Warsaw Stock Exchange, perhaps to transfer blocks of shares to the Polish investors (in case such blocks are found).

Afterwards, however, if the BSE wants the liquidity of the Proprietatea Fund to stay here, then it should review opening up the market (many foreign institutional investors are complaining about that) and the level of commissions".

Ovidiu Fer says that the BSE and the CNVM don't have many ways to stop the listing, nor do they have too many reasons to do so: "And it would be extremely immoral to do so. In the end it is up to the shareholders... the Proprietatea Fund is a private company".

• • An opinion by BCR: The listing of the Proprietatea Fund in Warsaw - unavoidably a liquidity loss of the BSE

The listing of the Proprietatea Fund in Warsaw will unavoidably result in a loss of liquidity for the BSE, because most likely an important part of the institutional investors, who own over 45% of the shares, will gradually opt for the Polish Stock Exchange. On the other hand, the listing in Warsaw is done precisely to attract new foreign institutional investors who would become active in the Proprietatea Fund, who would find their counterparty precisely in the current financial investors which are shareholders of the company. But a loss of liquidity for the BSE because of that listing is an issue of lesser importance compared to the major challenges involved in the further development of the Bucharest Stock Exchange. Even with the Proprietatea Fund present on the BSE in 2011, the average liquidity of about 10 million Euros was smaller than that of a single issuer listed on another stock exchange in the region, such as CEZ, OTP, OMV, PKO BP, KGHM, which regularly see trades of 15 million Euros per session. Overall, the stock exchanges of the Czech Republic and Hungary had a daily turnover of 60 and 55 million Euros in 2011, and 250 million Euros in the case of the one of Warsaw. As such, and with a lower liquidity than in the case of the Proprietatea Fund, after the listing on the Warsaw Stock Exchange, the Bucharest Stock Exchange looks just as worrisome when compared to the others in the region.

The listing of the Proprietatea Fund was an important event because it truly brought a sizeable company capable of attracting the attention of the major institutional investors when it comes to Romania. But it is obvious that the listing of the Proprietatea Fund was not a panacea for the BSE, like many mistakenly thought it would. The BSE has the same structural weaknesses which it did before the listing of the fund managed by Franklin Templeton. The Proprietatea Fund was, and still is a growth opportunity for the BSE, because there are more financial investors who currently have exposure to Romania than there were before its listing.

The most important part of the Proprietatea Fund for the BSE is to serve as a development vehicle for the local stock market, because the IPOs launched by significant state owned and private companies will have better odds of success anyway than they did before it was listed.

The listing of the Proprietatea Fund in Warsaw is exclusively the option of its shareholders. This decision was made based on the consideration that it would attract new foreign investors, supporting the aggregated demand for stocks and as a result, the price of the shares of the Proprietatea Fund would be influenced positively. Since we are talking about the will of the shareholders, I don't think there is a risk of the domestic brokers or the institutions of the market taking an administrative position against the listing of the Proprietatea Fund in Warsaw, considering that there already exists a practice of dual listings in the European Union.

The challenge for the BSE would be if other major companies decided to imitate the Proprietatea Fund, or, even more unpleasantly, major private companies decided to go to the Polish stock exchange directly, to the detriment of the local market. From this point of view, it is the responsibility of the community of local brokers, to convince the private companies that the local market is the most adequate in terms of visibility for the investors interested in Romanian assets. In that regard, let's not forget the experience of A&D Pharma, which got listed in London in October 2006, following an IPO of 136 million Euros (the biggest ever launched by a Romanian company) only to get delisted in 2011 precisely because of the extremely low liquidity and visibility. As such, the domestic market has strong benefits when it comes to very small companies, but this needs to be implemented by the local brokers.

In the coming years, the state will help the BSE by listing some companies, of which the most important will be Romgaz, and, we hope, Hidroelectrica, but this is only one of the needs of the BSE, but it is not enough for its development. Just like in the case of the listing of the Proprietatea Fund, the listing of state owned companies will create/enhance the growth opportunities for the BSE. But the opportunities will only materialize if the local brokers succeed in convincing private companies to get listed on the BSE. Any other subject is secondary in the long run, when it comes to the future of the BSE. (Mihai Iulian Căruntu, Coordinator of the Equity Market Research of BCR)