The Slovenian Ministry of Finance announced it would issue bonds for citizens, following a solid example from Croatia, which resulted in strong oversubscription of the same type or product. The volume of the issuance is expected at c. EUR 250m. The interest rate will be determined before the announcement of the call for bids for the bond subscription. Interest up to EUR 1,000 will not be taxed.
Last week, the Slovenian Ministry of Finance announced it will issue bonds for citizens. The goal of this issuance is to educate and inform the general public about safe investment opportunities with an emphasis on savings, as well as the revival of the capital market with new instruments. The volume of the issuance is expected around EUR 250m.
For comparison, Croatian government was very active in promoting debt capital market in 2023. In March it issued EUR 1.8bn of local 2-year bonds out of which EUR 1.3bn was allocated to retail at 3.65% YTM. And, again in November government issued EUR 715m of treasury bill allocated to retail.
When looking at pricing of the Slovenian retail bond, first the maturity for bond has to be determined, but it is expected that it will be between 2 and 5 years. The interest rate will be determined before the announcement of the call for bids for the bond subscription, on the basis of the extrapolation of the yield curve of treasury bills and with the markup of the tentative premium for the new issue. Croatian 10Y government bond is currently priced at 38 bp above Slovenian government bond. When looking at Slovenian yield curve we can say that Slovenian bonds could be priced around 3%, when looking at suggested maturities.
Slovenian Government Bonds yield curve
Source: Bloomberg, InterCapital Research
The minimum subscription amount will be EUR 1,000 and the maximum amount will be EUR 100k, whereby in case of oversubscription, the number of bonds that will be allocated to an individual investor may be less than the subscribed amount, but not less than EUR 1,000, which is a minimal subscription amount. Finally, taxes will be equated with the treatment of interest from cash deposits at banks and savings banks, meaning that interest up to EUR 1,000 will not be taxed, while the amount above that will be taxed at 25%. For comparison, interest on Croatian national bonds are not taxed at all, as they are treated as interest from cash deposits at banks and savings account. However, let’s not forget the scenario where an investor does not hold the bond until maturity (sells it on the stock exchange) – investor would pay a capital gain tax, if one existed in the first place. Slovenian capital gain tax amounts to 2% in this case. According to the unofficial data, the main organizers will be NLB and Nova KMB, while investors should be able to submit offers at other brokerage companies too. Finally, bonds will be listed on the LJSE for the time of duration.
As stated by the Slovenian Ministry of Finance, issuance was already planned last year but was delayed due to a few circumstances like the inflows from the Recovery and Resilience Mechanism, the level of liquid budget assets, the achievement of the target level of government sector debt and other.
At the end of November 2023, the Croatian mutual funds recorded a total NAV of EUR 2.14bn, growing by 1.7% MoM, but still remaining negative on a YoY basis at -4.4%. In the last 12 months net contributions to mutual funds amounted to EUR -77m, so majority part of value decrease comes from lower assets. YoY NAV decrease in absolute terms amounted to EUR 99.2m, while in NAV, management fees are also accounted for. At the same time, compared to the pre-COVID-19 level, the current NAV is app. 31% lower.
The Croatian mutual funds, one of the most important participants in the Croatian capital markets, have recorded solid MoM growth for the second month in a row, according to the latest report by the Croatian Financial Services Supervisory Board. In fact, during November 2023, the total NAV grew by 1.7% MoM (October 2023: 1.9%), reaching EUR 2.14bn. However, on a YoY basis, the Croatian mutual funds have still not managed to recover the losses recorded during the year, leading to a 4.4% lower NAV YoY. Furthermore, compared to their pre-COVID-19 maximum, the current NAV stands at app. 31% lower level.
To better understand what are the primary drivers of these changes, and to be able to make conclusions based on the data, it is important to look at the developments of the asset classes. On a MoM basis, the largest increase was recorded by bond holdings, which increased by EUR 16.3m, or 1.2%. Following them there are shares at EUR 9.1m, or 2.6%, and receivables, at EUR 8.9m, or 57%. On the other hand, on a YoY basis, the largest increase was recorded in shares, which grew by EUR 72.6m, or 26%, while the majority of other asset types which recorded growth, had recorded significantly lower levels of it. On the flip side, deposits and cash recorded a decrease of EUR 168.8m, or 45%, followed by the money market, which declined by EUR 21.7m, or 33%.
Total assets of Croatian mutual funds (January 2015 – November 2023, EURm)
Source: HANFA, InterCapital Research
Besides the changes in the assets, net contributions to the funds amounted to only EUR 1.9m during November, but they are positive since April when they were almost EUR 18m. Meanwhile, when we look at TTM (trailing twelve months), the total net contributions to investment funds amounted to EUR -76.8m, while the YoY NAV decrease in absolute terms amounted to EUR 99.2m. In other words, 78% of the decline in the NAV of the funds came from the decrease in the net contributions, while in NAV, management fees are also accounted for.
Due to this, the increase in the value of bond holdings on an MoM basis could have come from two other sources: the increase in the inherent value of bond assets that are held by the funds, but also due to the decision by the fund managers to allocate the available resources in a way that favors bond holdings. This was to be expected of course, due to the fact that the current yields offered by bonds seem quite attractive, especially in the long term, for two reasons. Firstly, as inflation continues to decline towards desired levels (2% to 2.5%), the need for high-interest rate levels by the ECB is reduced. In fact, there have been signals that rate cuts might come later this year. This relates to bonds in a way that investing in them right now when the interest rates are high and “locking” those investments for a longer time period will yield higher returns when the inflation cools off and interest rates are lower. Secondly, bonds are seen as one of the least risky types of investments, so shifting investments from other asset classes (such as deposits and cash) seems to also be a contributing factor.
This is a recent trend, however, as the YoY data shows that the majority of investments were targeted toward shares. This includes investments into both domestic and foreign securities and deposits. Here we see a discrepancy, however, as domestic securities and deposits underperformed, both on an MoM (EUR -17m, -2%) and YoY (EUR -301m, -29%) level. On the flip side, foreign securities and deposits recorded growth on the MoM (EUR 68m, +5.4%), and YoY (EUR 359m, +37%) level. However, it should be noted that the decline in domestic securities and deposits came mostly due to lower levels of Croatian government bonds held, which declined by 40% YoY, while domestic shares grew by 34% YoY. This is in fact, in line with the levels seen by the major Croatian indices, which grew by similar levels to this during the period.
Finally, turning our attention to the current AUM of the funds, bonds still make up the majority of the asset holdings, at 61.6% of the total, representing a decrease of 0.28 p.p. MoM, but an increase of 3.19 p.p. YoY. Next up there are shares at 16.4%, which is an increase of 0.15 p.p. MoM, and 4.03 p.p. YoY, as well as deposits and cash, which declined both on a MoM and YoY basis, at -0.15 p.p. and -6.95 p.p., respectively. Lastly, there are inv. funds, which hold 9% of the current AUM, declining by 0.09 p.p. MoM, but increasing by 0.37 p.p. YoY.
Current AUM of Croatian mutual funds (% of the total, November 2023)
Source: HANFA, InterCapital Research