With a GDP growth of 3.4 percent in the second quarter of this year, Croatia continues to be in an economic upswing. This is also evidenced by the aggregate data on corporate performance (profits have cumulatively increased by 15.5 percent since the beginning of the pandemic). However, such growth needs to be financed. Since banks are not always generous, especially towards small and medium-sized enterprises, they have been forced to turn to the capital market.
Indeed, mainly thanks to intermediaries like Escont Partners, who have managed to push the issuance of corporate bonds for several companies in a short time. Is this an indication of a long-term trend, what role do relatively high interest rates play in this, are there enough issuers and investors, all this and much more we asked Ivor Jelavić, the head of Escont Partners.
With previous issuances and announcements of several domestic IPOs, as well as corporate bonds, can we conclude that the source of financing for companies has finally begun to change – from banks to the capital market?
– Croatian companies are increasingly recognizing the capital market as a relevant source of financing, but this does not imply a departure from banks, rather a complement. A real change will occur only when the capital market becomes more accessible and interesting to small investors; without their involvement, there is no real breadth and liquidity. The key is in a good offering. Every issuance must be clear, high-quality, and sufficiently transparent for investors to recognize it as an opportunity themselves. The capital market allows for greater flexibility, better diversification of funding sources, and stronger visibility of companies in the market. That is why we work with small and medium-sized enterprises (SMEs) to structure issuances that meet both their needs and the expectations of investors.
The Zagreb Stock Exchange launched the Progress market eight years ago, aimed at financing precisely them, but with very weak response. Why?
– The Progress market is a good concept, but it initially lacked the breadth of market infrastructure, from educating issuers and investors to quality support in preparing issuances. Many SMEs did not have the capacity, often lacking trust in a process that seemed expensive and administratively demanding. On the other hand, investors did not receive enough attractive and clearly structured offers that would encourage broader capital activation. However, thanks to the increasing number of successful issuances, in which we also participate as advisors, the market shows signs of maturity and opens space for the Progress market as a real platform for financing the growth of SMEs.
How much has the state pushed this by issuing government bonds and treasury bills?
– The state has certainly provided a strong impetus to the capital market. An important step has been made towards involving citizens and raising public awareness about investment opportunities outside of traditional savings. This move has sparked interest among small investors, which will positively affect the corporate sector, provided that the offering develops qualitatively. However, it is crucial that the bond market does not remain solely on government instruments, but that the trust and capital of citizens gradually flow into the bonds and shares of private companies.
Has a long-term trend begun, or was it a one-time sprint, especially since interest rates have decreased in the meantime, and inflation has not yet been extinguished?
– For sustainable and long-term development of the capital market, it is essential that alongside government instruments, private issuances, corporate bonds, and shares of companies, especially SMEs, also grow. Such diversity in offerings is necessary to make the market more accessible and interesting to a broader circle of investors. This is where we see a key change. Today, even smaller issuers can access the capital market with professional support; investors are no longer focusing exclusively on large companies.
Should the state have kept higher interest rates until the habit of this form of investment becomes ingrained?
– That is a very interesting question, but there is no universal answer. On one hand, higher interest rates on government bonds could have further motivated citizens to engage in the capital market and develop investment habits more quickly. On the other hand, excessively high interest rates are not always sustainable and can create expectations that are not easy to fulfill in private issuances. In Croatia, where the investment mentality is still developing, given that investments are traditionally made mostly in real estate and bank deposits, it is important that the capital market is built gradually and on sustainable foundations. Government instruments have therefore been an important step that has opened doors for investors, and now it is crucial to build on that interest with quality private offerings and education.
However, companies still prefer banks over the capital market. Is it a matter of transparency, which is more demanding when issuing debt securities? Or in selling part of the shares that companies, mostly family-owned, do not want to give, even temporarily?
– Companies, especially family-owned ones, traditionally prefer banks because they have already built that relationship and because the borrowing model is familiar, predictable, and in many cases simpler. In capital markets, the challenges are higher levels of transparency, more demanding preparation, and often fear of losing control, even when a majority stake is not being sold. Such resistance often stems from insufficient information and lack of experience in dealing with investors and the public. That is why we are pleased that younger entrepreneurs and a new wave of founders better understand capital markets, venture capital, and private equity, and recognize that this is precisely the solution for projects that banks cannot or do not want to finance.
What conditions must companies meet to issue bonds?
– For a company to issue bonds, it must meet several basic conditions. First of all, it must operate stably and transparently, meaning it must manage finances properly and have clear business plans. It must have a sustainable business model and a clear purpose for raising funds. Another important condition is the credibility of the management and ownership structure, as trust plays a key role in any issuance. Investors want to understand to whom they are lending money and under what conditions, and when they will get it back. Of course, there is also the technical side of the issuance, cooperation with SKDD, Hanfa, the stock exchange, and other stakeholders. But the key thing is the quality of the projects and the willingness to communicate with the market in a way that investors understand and believe in.
What does the process look like for a small or medium-sized company that wants to finance itself this way? What is the most complicated part for them?
– The process begins with assessing readiness, business, financial, and organizational, and a clearly defined purpose for the raised capital. After that, the structuring of the issuance follows: targeted amount, maturity, interest rates, potential security instruments. It is crucial that the issuance is tailored to the real capabilities of the company and the interests of investors. The next phase involves preparing documentation. Investment materials such as pitch decks, Q&A documents, landing pages, and basic communication infrastructure are created. SMEs often enter such a process for the first time, so it is important that they are professionally presented to the market. After that, communication with potential investors follows through direct conversations, presentations, and individual inquiries, as well as opening and closing the bond subscription. The most challenging part is usually that change in mindset, stepping out of the comfort zone, and being willing to publicly present their business model.
How have previous issuances performed, and what can we conclude from that?
– Previous issuances have performed very well, amounts have been successfully subscribed, and investors have shown concrete interest, especially among smaller and private investors. Issuers have entered the market for the first time, which further confirms that with good preparation and clear communication, it is possible to successfully carry out the process even for lesser-known companies.
These bonds can, but do not have to, be traded on the stock exchange. What is the difference for the company, and what do you advise, when to go public, when not, who makes the decision?
– Correct, bonds can, but do not have to, be traded on the stock exchange. Listing on the stock exchange, on the Progress market, implies greater transparency and regular reporting for the issuer, but also greater credibility with investors. On the other hand, if it is a private offering without listing, the process is simpler, but with a somewhat narrowed circle of potential investors. If a company has a clear growth strategy, wants to build a reputation in the capital market, plans new issuances or talks with foreign funds and/or investors in the future, listing can be a good decision. If the goal is one-time financing with a limited number of known investors, then a private offering without the stock exchange may be more effective. The decision is made by the issuer themselves, and we as advisors help assess what is realistic, feasible, and in line with the company’s goals. Also, in the case of listing on the Progress market, it does not automatically mean that the bonds will be actively traded, but that the issuance is in a regulated environment that provides investors with an additional level of security and transparency. We advise all issuers to maintain a high level of transparency and quality communication with investors.
Investors are certainly attracted by a coupon interest rate of, depending on the company and the maturity of the bonds, 5.5 to even eight percent! What kind of business can withstand such interest rates?
– That is a legitimate question; 5.5 to eight percent coupon interest sounds high when compared to deposits or government instruments. However, it should be taken into account that these are completely different forms of investment with different levels of risk, duration, and expected returns. Companies that decide to issue bonds at these rates are generally in fast-growing sectors, with clear expansion plans, and often banks cannot or do not want to provide the necessary flexibility. They need this capital to finance development, new products, markets, or capacities, and then an interest rate of seven percent can be a rational cost if the project carries an adequate return. Additionally, investors seek higher returns precisely because they are investing in companies that are not government-owned, are not stock market established, and do not offer collateral in the form of real estate. But that is why we return to the previously touched topics, the importance of transparency, good preparations, and realistic plans. High interest rates are not a business barrier if a sustainable and well-thought-out project stands behind them, and the issuer knows how to implement it and repay the debt.
On what basis do you make decisions about such interest rates? Is the basis for this expansion into other markets, i.e., quantitative growth? Where is the ‘catch 22’?
– The interest rate is not determined arbitrarily; it is the result of a series of analyses and discussions with the issuer. First, the company’s financial strength is analyzed, and then the specific plan being financed. It is not just about quantitative growth but also about sustainability. We discuss possible options with issuers regarding how realistic a certain interest rate would be in their situation. The decision on the coupon rate ultimately arises from a combination of financial projections, risk tolerance, the targeted circle of investors, and the issuer’s own decision. The ‘catch 22’ is that companies understandably want lower interest rates, while investors seek higher returns for the risk taken.
That such interest rates are not trivial was also pointed out by Hanfa at the beginning of summer, especially since you compared them in announcements with government securities.
– It is important to clarify that Hanfa did not warn about the height of the coupon rate itself, but about the way the comparison with government bonds was presented in the media. However, the comparison with government bonds was not intended to equate risks but solely to illustrate the difference in returns that investors can achieve, with the awareness that higher returns always mean higher risk. We never equate the investment profile of corporate bonds with government ones, neither in communication with investors, and we do not present it as an equal degree of security. That is why it is always emphasized in communication with investors that this is an investment in an entrepreneurial project that carries risk and that investors must be aware of all aspects and carefully assess whether such instruments align with their profile and expectations. Ultimately, the level of interest also reflects the assessed risk, the market position of the issuer, and the trust that still needs to be built.
Investors are interested in security as well as returns, and it somehow seems that security and high earnings do not go hand in hand, which Hanfa also emphasizes.
– It is important to accurately interpret Hanfa’s message. It did not refer to the height of the interest rate as a problem, but to the need for transparent and appropriate risk representation to investors. All key elements of the investment were clearly emphasized to investors, including the level of risk, the purpose of the raised funds, and the expected business development. In every investment, including corporate bonds of SMEs, security and the height of potential earnings are necessarily in some balance. High returns reflect the risk taken. In the case of most previous issuances, these are growth projects, expansion into new markets, or investments in capacities, thus business strategies that inherently contain an element of uncertainty, but also potential for return. Investors know that the capital market is not savings but investment, and that is what Croatia is slowly learning. In the end, trust is built through transparency, fulfilling promises, and sustainable communication.
How many more companies are ready for such a leap?
– Interest exists and grows every day, and based on the conversations we are currently having, we can say that there are serious companies that are actively considering entering the capital market by issuing bonds. These are companies that are growing and seeking funds for expansion or diversification of their business. It is important to understand that the process of issuing bonds is neither quick nor an instant solution, especially not in our market, which is still in a development phase, particularly regarding SMEs and the capital market. We hope to see more successful issuances in the next six months to a year. The Croatian capital market desperately needs good, safe, and transparent issuances to build trust and encourage as many small investors as possible to invest.
