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Bank financing is the most popular way to raise funds for business expansion. But it is far from the only one. According to experts, any transparent and responsible business can consider entering the stock market. One of the first questions that arise is which way to go: issuing shares or bonds? Experts and practitioners point out that each has its own advantages and can be easily adapted to the situation and needs of a particular company.

Myths and stereotypes are obvious obstacles to the development of capital markets. Experts note that there are many advantages for companies to list on a stock exchange, not only in terms of financing but also in terms of reputational aspects that are important in business, such as visibility and transparency.

A number of differences to consider

A stock market flotation raises additional capital for business development, growth, acquisitions, etc. “While a share placement allows the main shareholders to retain control of the company and thus attract new investors, it can also be a way for existing shareholders to exit. A share placement contributes to increasing the company’s visibility, credibility, transparency, and reputation by putting the company on the map of local and international investors. Usually, a share placement improves bank lending conditions and brings the company to the next level of maturity,” emphasizes Saulius Malinauskas, the president of Nasdaq Vilnius Stock Exchange.

Nasdaq advises companies seeking to raise capital for long-term investments and wishing to maintain freedom of decision and control over borrowing conditions to issue bonds: issuing bonds does not change the shareholder structure, as bonds are not equity securities.

“It’s more flexible financing as there are fewer pledges and other obligations in the case of bonds, and the dependence on banks is reduced as the company already has several borrowing options,” says Malinauskas.  

The new business hygiene

The first tranche of EUR 3 million of a EUR 5 million bond issue planned for the end of 2019 has been floated on the Nasdaq Vilnius exchange by InMedica, a company operating a network of medical clinics. Nerijus Drobavičius, a partner at INVL Baltic Sea Growth Fund and chairman of the board of InMedica, says that the private equity fund invested in this medical business in order to expand the company’s scope of operations, both geographically and in terms of the range of services it offers. The company’s ability to finance the expansion with bank loans was limited. The company had no real estate assets, and its historical EBITDA (earnings before interest, tax, depreciation, and amortization) was low and “young”.

“These circumstances led us to the bond market. The successful placement of the first bond issue of EUR 3 million gave us more room for maneuver and the courage to invest in both organic growth and in the acquisition of clinics. We successfully placed the second tranche in June 2020 despite the pandemic. We have seen that investors believe in a company if it has a vision and a clear plan on how the borrowed funds will be used. As already mentioned, we have channeled it to the financing of new acquisitions and the opening of new facilities. We have used the bond issue to expand InMedica’s network and increase the availability of services to our patients,” says Drobavičius.

Dalia Augaitė, a senior associate at law firm Sorainen, encourages companies that are considering a bond issue but are concerned about the complexity of the underwriting process.

“Fear can be blinding at first, but once the issue is underwritten, everything seems simpler and can be easily replicated later. Issuing bonds is an alternative source of financing for businesses and having a choice also gives you more freedom of action in your business. Of course, issuing a bond requires the preparation of a package of documents and disclosure obligations that are not mandatory for unlisted companies. However, the documentation for bond issues up to €8 million is not particularly complex, and the main one is the Issue Information Document, which lists the terms of the bond and discloses basic information about the issuer, its business and the risks taken by investors. In terms of increasing transparency, the disclosure of information on shareholders and managers, significant business transactions. However, this is not just an obligation, but also new business hygiene, which significantly contributes to the transparency of the company and benefits the company itself,” emphasizes D. Augaitė.

Among the leaders

Perhaps the most notable recent event on the Lithuanian capital market was the IPO of Ignitis Group a year and a half ago, which raised EUR 450 million of capital. It is the second state-owned company to go public after a 20-year hiatus, listing its shares on Nasdaq Vilnius, the main trading list of the Baltic Exchange. Ignitis Group currently has a capitalization of around €1.4 billion.

As Jonas Rimavičius, CFO of Ignitis Group, points out, and the IPO has brought Ignitis Group to another level of maturity. First and foremost, by attracting international talent with experience in leading global energy companies, such as the new CEO of Ignitis Renewables, Thierry Aelens. Major international investors are raising the bar in almost every area: setting targets, financial discipline, dividend payments, and ESG best practices. “This means that after the IPO, we are no longer comparing ourselves with local players in the Baltic States, but with global energy leaders,” says Rimavičius.

Jonas Kvedaravičius, head of investment banking at Swedbank in Lithuania, notes that IPOs start with the shareholders’ idea. The need for an IPO arises when a company needs additional funds for expansion or when it decides to evaluate or partially realise the value created by the company. Preparing for an IPO is a complex and intensive process that is facilitated by the consultants selected and shortly thereafter by a team of experts in the necessary fields. Kvedaravičius estimates that the entire IPO process, including preparation and IPO, takes around 6-7 months.

Changes are expected

This spring, the Lithuanian Banking Association (LBA), Nasdaq, and the Bank of Lithuania joined forces to focus on the stock market: a series of remote events with experts and practitioners attracted hundreds of participants. According to Dr Eivilė Čipkutė, president of the LBA, the interest is encouraging, especially as the Lithuanian capital market is expected to undergo significant changes already this year, which should be stimulated by the Capital Market Development Measures Plan of the Bank of Lithuania (LB).

It is expected to lead to growth in the capital market and make the country more attractive to national and foreign investors. The debate on why the Lithuanian capital market is not sufficiently active has been going on for some time. Experts and market participants believe that the new measures being implemented should break the ice in this area.

The LB expects the measures to increase the regulated market and the multilateral trading facility by a quarter by 2025, the crowdfunding market by a factor of two and the number of companies issuing bonds by three quarters.

According to Nasdaq, 17 new equity issuers have entered the Baltic market in the last few years. 

Seven issuers have joined the Baltic regulated market, four of which are quite large: the Port of Tallinn, Ignitis Group, Coop Bank and Enefit Green.