Investors are already trying to calculate the potential price in London, as well as the traded volumes and the impact of the listing there on the transactions in Bucharest.
The stake of the secondary listing of Fondul Proprietatea in London is getting the trading discount down from the current about 20% to 15% of the net asset – as stipulated in the new management contract Franklin Templeton signed, by reaching new investors.
US hedge fund Elliott, the largest Fondul Proprietatea shareholder (19%) was the one that put the 15% discount target in the contract.
Fondul Proprietatea is the third largest company by capitalization on the Bucharest Stock Exchange, with its 11.2 billion lei (EUR2.54 billion). It is the most traded share on the Bucharest market, accounting for one quarter of the total traded volume. The fund has RON12.6 billion assets, half of which OMV Petrom (SNP.RO) and Hidroelectrica stakes, worth RON3.9 billion and RON2.1 billion, it got from the Romanian government upon establishment.
The secondary listing in London will be a technical procedure, there will be no new shares issued and no new offering. The fund will be listed there via global depository receipts (GDR), taking the same route as Romgaz (SNG.RO) and Electrica (EL.RO) did. Its GDRs will be traded on the specialist fund market of the London Stock Exchange. Each dollar denominated GDR will represent 50 underlying shares. GDRs are capped at one third of the total shares, that is 4 billion shares or 81 million GDRs. Raiffeisen Bank is the custodian of the GDRs, while Bank of New York Mellon is the depository.
The main questions Fondul Proprietatea’s listing in London raises
1. What will be the listing price in London?
The brokers ZF asked say the price at which the fund is traded on the Bucharest Stock Exchange will be the starting point for setting the price in London and then the supply and demand ratio on that market will create either a premium or a discount to the price in Bucharest.
Romgaz, for instance, where one GDR represents one underlying share, is trading at $8.78 in London, or RON35.73 per share. The GDR is down compared with the offering price, while the Romgaz stock price is higher, which explains why many investors chose to exchange GDRs for shares. Brokers say Fondul Proprietatea’s GDRs might reach a higher price than its shares in Bucharest, if conversion is close to the maximum permitted limit of 81 million GDRs.
2. Who will sell and who will buy in London?
Since there is no offering of shares, at least one of the 8,600 Fondul Proprietatea shareholders will have to sell some of theirs. Prior to the sale, the fund’s shares will have to be “packaged” into GDRs. Theoretically, any local broker can do the conversion. The conversion of the fund’s shares into GDRs is free of charge for three months.
Local brokers fear there is a risk that shares might be moved from accounts in Bucharest to London, because the latter is cheaper and more flexible. The foreign investment funds were among the biggest sellers of Proprietatea shares on the Bucharest Stock Exchange in the first quarter of this year, 191 million in all. The main buyer on that market was Fondul Proprietatea itself via its buyback program. The fund sought shareholders’ approval to repurchase its shares on the London Stock Exchange, as well and for a new buyback program.
3. What will be the traded volumes of Fondul Proprietatea in London, is there a risk for a decline in liquidity in Bucharest?
Brokers expect the GDR transactions to be bigger in the first few weeks after the listing, but would not provide any exact figures, and then decline as happened with Romgaz and Electrica. GDR transactions on Romgaz’s first day in London, November 12, 2013, stood at $37 million, while in Bucharest the share transactions amounted to RON92.5 million ($27.8 million).
In April 2015, the total GDR transactions reached about $7 million, while in Bucharest the share transactions were almost three times higher, almost RON79 million ($20 million). Local brokers expect Fondul Proprietatea’s GDRs to see similar traded volumes to the other Romanian GDRs in London. GDRs entitle holders to voting during the general meeting of shareholders and getting dividends.
4. What other funds are traded on the specialist fund market?
The London Stock Exchange created the specialist fund market in November 2007. This is a regulated market, offering access to institutional and professional investors. Fondul Proprietatea will be the largest closed-end fund there, taking into account its almost GBP2 billion assets. A note of the Financial Supervisory Authority (ASF) shows 24 investment funds are listed on this market.
Looking at the top 11 by capitalization, three are trading at a premium and eight at a discount. The highest discount is 37% and the highest premium is 232%, while most discounts stand at 14% to 16%, according to the ASF. The funds with the highest capitalization on this segment are trading at 4% to 16% discount, while the discounts for closed-end funds on the Bucharest Stock Exchange (the five regional investment funds SIF and Fondul Proprietatea) stand at 20% to 55%.
5. Will the fund’s investment strategy change after the London listing?
Brokers do not expect the listing in London to lead to any changes of Fondul Proprietatea’s investment strategy. The priority of the fund’s manager is to get the trading discount down to 15% of the net asset. To attain this goal, Templeton is taking the fund to London, buying back shares, distributing shares and planning to lower the percentage of unlisted companies in the fund’s portfolio. On March 31, 2015, Fondul Proprietatea had more than 50% of its assets invested in unlisted companies, with the 20% Hidroelectrica stake (RON2.1 billion) being the most valuable such holding.
(English version by Loredana Fratila-Cristescu)