OECD made a diagnosis of the problems of the Portuguese capital market. It stresses that the Covid-19 crisis has only made reforms "more urgent" to support economic recovery.
The capital market is seen as a source of funding for only three out of ten companies in Portugal. Shareholders who do not want to give up control explains the disinterest of most companies, but – among those that were listed or even wanted to be – it is the weight of regulation and bonds, together with the low liquidity of the national stock market, that discourage entry into the stock market.
The reasons were identified by the technicians of the Organisation for Cooperation and Development (OECD), who were in Portugal to make a diagnosis of the Portuguese capital market, in collaboration with the Securities Market Commission (CMVM). The analysis of the business fabric showed that only 30% sees the capital market (shares and bonds) as an important source of financing.
“The vast majority of unlisted companies have indicated that they do not consider going public,” explains the study “Improving access to capital for Portuguese companies: A survey of unlisted companies” released this Thursday. Why? “The most common explanation is that shareholders don’t want to share control with others,” he points out. The costs related to the listing, low levels of liquidity and the complexity of regulation were also pointed out by half of the companies.
The OECD considers it relevant that 30 companies (12% of the total) have even sought information in the past on the process of going public, but gave up before the initial public offering (IPO). “More than thirds of these companies mentioned complex regulation, high corporate governance requirements and the low liquidity of the market in order not to continue the process.”
Even so, there are companies that want to obtain financing from the capital market. As for shares, 11 companies (4% of the total) said they plan to go public within three years.
More captivating is debt. 48 companies (19%) plan to issue debt instruments (including bonds, commercial paper or others) in the “near future. They all identified “diversification of sources of finance and improvements in access to other forms of market finance as the main reasons for issuing debt,” explains the OECD.
The study serves as a basis for the CMVM to issue a series of recommendations for the boost of the capital market. Although the OECD experts do not answer the question of how the capital market could be more seductive for the business community, it highlights that “over 80% of unlisted companies stated that simplifying reporting and compliance requirements, simplifying listing procedures, a framework of alternative segments and more flexible corporate governance requirements would contribute to creating a successful capital market ecosystem in Portugal.”
The analysis was made before it was imagined that coronavirus would further penalize capital market liquidity. According to the OECD, the Covid-19 crisis only made reforms “more urgent” as the recovery of the economy will “largely depend on the ability to strengthen corporate balance sheets and give access to business to patient capital from forward-thinking investors.