mBank zloty duo ‘pays off’, as tax dispute thwarts euro entry
A quickfire PLN1.5bn of covered bonds from mBank Hipoteczny “paid off”, finding new accounts, according to its head of treasury, as it tapped its local market while unable to issue internationally because of a ruling from Poland’s tax authorities, which it is appealing through the courts.
mBank Hipoteczny’s first deal of the two, a PLN500m (Eu118m) five year issue on 29 September, was priced at 75bp over three month Wibor on the back of over PLN900m of orders.
It was mBank Hipoteczny’s first public zloty-denominated issue since May 2016 – and the first zloty issue from a new prospectus approved in 2016 – but the issuer returned to the market less than two weeks later.
“Basically, we had a significant oversubscription on the first deal, which incentivised us to change our plans and quickly come back to the market with another issue,” Krzysztof Dubejko, head of treasury at mBank Hipoteczny, told The CBR.
“We had the capacity to do that, and obviously there was sufficient demand. Recently, due to low inflation and low issuance of Polish government bonds, there is material demand in the market for zloty debt, and spreads are favourable.”
On Monday of last week (9 October), the issuer priced a PLN1bn six year issue at 82bp over three month Wibor.
“What’s especially important is that we placed these bonds not only with our long term investors, like investment funds and pension funds, but also with new investors like insurance companies and banks,” said Dubejko.
“We are trying to expand the investor base, and some of the investors in the first trade asked to take part in the larger issue, so we decided to print PLN1bn in the second transaction so their interest could be accommodated easily. It paid off.”
The deals were allocated entirely to Polish accounts. Insurance companies and pension funds were allocated 55% of the PLN500m five year issue, fund managers 43% and banks 2%. Insurance companies and pension funds took 60% of the PLN1bn six year, fund managers 13% and banks 27%.
The substantial interest in the deals was attributed partly to the bonds’ higher rating compared with the last time mBank tapped the market. In 2016, Fitch upgraded mBank’s covered bonds twice, first from BBB to BBB+ following an upgrade of Commerzbank, which is the majority owner of mBank, and then from BBB+ to A, partly reflecting amendments made to the Polish covered bond framework in January 2016.
Dubejko said the issuer had not issued any “substantial” public covered bonds since May 2016 because it had been building up collateral to issue a euro-denominated benchmark covered bond from a new Eu3bn international programme, which was established in July but has not yet been used.
mBank instead decided to use this collateral for the two zloty trades, issued out of an older, domestic programme, because of an ongoing dispute regarding Poland’s tax system.
Poland has in place a 20% withholding tax on interest payments transferred out of the country. When Poland’s covered bond law was updated in January 2016, interest paid for Polish covered bonds to non-domestic investors, both individuals and legal entities, was made exempt from this tax.
However, acting upon independent legal advice, mBank requested an individual interpretation from the Polish tax authorities regarding the rules. In their response, the tax authorities stated that the exemption to the withholding tax can only be applied once mBank Hipoteczny, as issuer and tax remittent, has identified the tax status of the bondholder.
“This is something we cannot from a technical perspective comply with, because we do not know who owns the particular bonds at the moment we pay the coupon, as we pay it to a central deposit and – obviously – the investors are anonymous,” said Dubejko. “How can you prove the investor is a foreign entity without knowing the identity of the investor?
“As far as we know, the Ministry of Finance also does not identify the investors on the bonds issued by the Republic of Poland. This creates confusion that the Ministry of Finance should clarify. Further, the bonds will also be traded on the secondary market, and could easily be sold to someone who is a Polish taxpayer.”
mBank’s compatriot, PKO Bank Hipoteczny, has issued three euro benchmark covered bonds internationally since making its debut in October 2016, and Polish government bonds are understood to be issued to international investors under the same rules that are in use for covered bonds.
A market participant said that the individual interpretation from the tax authority “is binding for mBank only and does not bind any other issuer”.
“Moreover, any tax risk is fully on the issuer’s shoulders and this interpretation does not create any risk for investors,” he said.
mBank is appealing the tax authority’s ruling through the courts, but Dubejko said this is likely to be a lengthy process. The bank is hoping that a clarification from the Ministry of Finance will address the issue in the near future.
Earlier this month, Maciej Żukowski, director of the income tax department at the Polish ministry of finance, said the ministry is working on a solution.
“The best solution for the whole market is to let the tax authorities sort out the issue as soon as possible,” said Dubejko. “So, we wish them all the best in addressing the issue this year and are preparing on our side for an international inaugural issue as soon as they are ready with the fix.”
PKO Bank Hipoteczny announced a mandate today (Friday) for a potential 5.5 year zloty-denominated covered bond that will be launched as early as next week. PKO Bank Polski is sole bookrunner.
Other Polish issuers are also expected to eventually join PKO in issuing euro-benchmark covered bonds. Pekao Bank Hipoteczny has euro sub-benchmark paper outstanding and regularly issues in zloty, while ING and Santander are setting up mortgage subsidiaries through which they plan to issue covered bonds.
The growing market has in recent times been held up as an example for countries in the CEE region and further afield that have covered bond ambitions to follow, with the 2016 update to the covered bond law seen as having unlocked Poland’s potential.
