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Boot Maker, Miner Revive Serb Bonds as Loans Dry Up

March 15, 2012

Tigar AD (TIGR), the company that makes Hunter Wellington boots, is showing how the corporate bond market is making a comeback in Serbia as the euro-area debt crisis is prompting banks to tighten credit.

The Pirot, Serbia-based company, which in 2008 acquired the Century Division of Hunter Boot Ltd., specializing in safety boots, sold 32 million dinars ($379,006) of 90-day notes that pay 26.82 percent a year, on March 8, as it awaits the first tranche of a 6.7 million-euro ($8.8 million) European Investment Bank loan. It was the 10th time in 18 months that it tapped domestic investors for a capital infusion.

“In crises, companies need to find sources of financing other than banks,” Jelena Petkovic, Tigar’s executive director for corporate management, said in a Feb. 28 interview in Belgrade. Selling notes is “simple and fast and there’s no need for collateral.”

Companies in the largest former Yugoslav republic including Tigar, holding company Koncern Farmakom MB, drugmaker Galenika AD and property developer Graditelj-Beograd AD, are returning to the local debt market after banks have become more restrictive in their lending as foreign owners shore up capital depleted by losses on euro-area debt. Serbia’s corporate market in short- term dinar notes peaked at $1 billion in 2001, fell to $70 million euros in 2004 and died out completely in 2005 as the government sold banks to foreign investors, who then offered loans at better terms.

Erste Group Bank AG of Austria bought Novosadska Banka AD from the government in 2005. Other foreign lenders operating in Serbia include Italy’s Intesa Sanpaolo SpA (ISP) and UniCredit SpA as well as Austria’s Raiffeisen Bank International AG (RBI), Societe Generale (GLE) SA of France and National Bank of Greece SA.

Renewed Borrowing

Tigar sold 1 million euros worth of dinar-denominated notes in August 2009 and 1.5 million euros in October 2010. This year, five companies have borrowed a combined 380 million dinars since Feb. 29, according to the Belgrade-based Central Securities Depository and Clearing House, pushing the total outstanding short-term corporate debt to $61.5 million.

Tigar shares closed unchanged at 490 dinars in Belgrade today, putting its market value at $9.89 million, or a third of its book value, according to the Belgrade Stock Exchange.

Farmakom, which has outstanding debt of $8 million, is active in mining, agriculture, retail and dairy business and plans to open four mines in 2012, digging zinc, antimony, lead and gold. The company in October signed a 120-million-euro loan from a group of private lenders led by the International Finance Corp., the World Bank’s private sector lending arm. Farmakom is using corporate notes as stopgap financing as it waits for the full disbursement of a 40 million-euro loan from the IFC.

Bridging Needs

Since Tigar and Farmakom, which owns businesses ranging from mining and car-battery production to dairy and retail, pioneered the return to short-term corporate debt, 39 companies have sold notes to bridge financial needs.

Galenika, a drugmaker once owned by ICN Pharmaceuticals Inc. that was nationalized in 1999, raised 200 million dinars in corporate notes this month while waiting for Parliament to approve sovereign-backed lending worth 70 million euros to refinance old debt.

“Companies are turning to short-term borrowing because they have been forced to do so,” said Slavko Caric, the chief executive officer of the Serbian unit of Vienna-based Erste Group Bank AG. (EBS) “Most of them have already exhausted bank borrowing limits and this is the way for them to bridge short- term liabilities.”

Bank Borrowing

Borrowing from domestic banks almost doubled since the end of 2008, with lenders now sitting on 514 billion dinars of long- term loans and 406 billion dinars in short-term credit to corporate clients, according to central bank data for January. Separately, Serbian companies owed 8.9 billion euros in long- term and 66.2 million euros in short-term debt to foreign creditors at the end of 2011.

Loan-loss provisions for long-term lending stood at a third of all loans, or $2 billion, more than double the 2008 levels.

Selling bonds is expensive. Companies in Serbia pay annual interest of as much as 27 percent on short-term dinar notes and as much as 10 percent on euro-denominated debt, according to the Central Securities Depository and Clearing House.

Bond Yields

Yields on Serbian government debt range from 10.48 percent for six-month Treasury bills to 14.70 percent for five-year bonds. Serbia’s benchmark 10-year, dollar-denominated Eurobond, sold with a 7.25 percent coupon last September, currently trades above par and yields 6.61 percent.

The total value of corporate bonds in Poland, one of the most rapidly growing markets in the region, rose 44 percent to 62.1 billion zloty ($19.9 billion) in 2011, according to Fitch Ratings.

Corporate notes with maturities of as long as one year accounted for 36 percent of the debt, up from 34 percent in 2010. PKN Orlen SA, the Polish oil refiner rated BB+ at Fitch, or two levels higher than Serbia’s sovereign debt, sold seven- year zloty-denominated bonds last month, priced to yield 6.58 percent.

In Turkey, Turkiye Garanti Bankasi AS, the No. 2 lender, issued 1 billion liras ($600 million) of local bonds last month, yielding 11 percent. Akbank TAS, the country’s biggest bank, sold 650 million liras of 178-day and three-year lira debt on Jan. 19 at an 11.6 percent yield. Both banks have a long-term rating of Ba3 by Moody’s Investors Service.

‘Premium Market’

In Pirot, a town of 38,432 with an average monthly wage of 33,678 dinars, or $40 below the nation’s take-home average, 2,000 people depend on Tigar.

Of the 21 million euros of orders last year, it managed to produce and sell 16 million euros of goods because it lacked financing, while it needs needs cash to meet client demand for 30 million euros of orders.

“Our products are designed for a premium market and our growth depends solely on capacity to finance raw material purchases,” Petkovic said.

To contact the reporter on this story: Gordana Filipovic in Belgrade at

To contact the editor responsible for this story: James M. Gomez at

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