PORTUGAL: An Introduction to Capital Markets

The Backdrop 

In what is likely to be an understatement, the current economic and political context is challenging, and unpredictable. Portugal ended 2022 with one of the lowest inflation rates in the European Union – the fourth lowest, according to Eurostat. It is still the highest in recent decades – 8.1% – and this makes it a key contributor to an increasingly adverse situation. Portugal also ended 2022 with positive economic indicators: GDP increased by 6.7%, public debt weight on the GDP dropped from 125.5% in 2021 to 114.7% by year end 2022, and the unemployment rate dropped from 6.6% to 6%. However, some of these indicators took a turn for the worse in the last quarter: GDP was practically at a standstill (even so, better that initially expected for such quarter) and the unemployment rate was almost at the 2021 level. There are several contributing factors to the unfavourable backdrop that is emerging, and none particular to Portugal: the war in the Ukraine, along with the global geopolitical uncertainty, as well as supply chain disruption are just a couple of examples. On top of these, the towering inflation and resulting increase in interest rates continue to negatively impact the market as a whole, and capital markets in particular.

The Market 

The uncertain market conditions in 2022 resulted in reduced activity in the Portuguese capital markets. In the equity segment – despite the continuous efforts in the local ecosystem – there were no new entrants. Only the usual suspects (EDP, Greenvolt) have looked at the market as a source of funding, while other issuers have taken advantage of good performance to engage in buy-back programmes. Likewise, debt capital markets saw fewer transactions, particularly in the second half of the year. The structured finance space has kept its usual flow of transactions, with a particular focus on the securitisation of ESG-driven portfolios of loans. Companies acting in the energy sector, and generally in the infrastructure space, continue to be seen as the most likely to get favourable conditions in market transactions, in light of the demand by large institutional investors for exposure to these types of projects.

ESG: Gradually, Then Suddenly 

As elsewhere, the ESG push in the Portuguese capital markets came in two ways: first gradually, but then suddenly. Across the entire spectrum of equity, debt and structured finance, the market has seen innovative transactions in energy-related IPOs, green bonds and other sustainability linked debt instruments in different sectors, and green securitisations. Players such as REN, Greenvolt and EDP, in the energy sector, but also players acting in other industries, such as Pestana in hospitality (the first worldwide to do so), or NOS, acting in the telecoms sector, have now issued several billion euros in sustainability linked debt securities. In the financial sectors, several banks have been active in green securitisation. This activity has been fuelled by the growing demand from private sector investors, but also public institutional investors such as the European Investment Bank. Despite the ESG backlash felt in other markets, this trend is likely to continue in 2023, with more diversified underlying projects and players joining the sustainable finance bandwagon.

The Players, and the Year Ahead 

Greenvolt is a company that specialises in producing electricity from renewable energy sources, which consist mainly of forest biomass, but also wind and solar. Coincidentally, this company has been one of the most active and successful players in the Portuguese capital markets during the last few months. Active both in the equity and debt segments, Greenvolt has had a very successful IPO, a very successful green bond issuance and more recently, a very successful rights issuance – all in just over a year. These circumstances may well be just another encouraging factor that may feed and unlock additional movement from this increasingly active player. Other established players, mostly in the energy and infrastructure spaces, are likely to tap into the market to help finance their ambitious expansion plans. Following the trend in neighbouring Spain, we would also expect Portuguese banks to expand their footprint in ESG-related transactions, entering the ESG-linked debt issuances space in response to growing demand from investors. Still in the financial sector, the expected exit by Lonestar from its investment in Novo Banco is also seen as a potential market transaction, whether or not involving consolidation with other players. Finally, it may also be the time for certain tech companies to take advantage of the favourable context – energy transition, push for smart infrastructure – and consider capital market transactions as the path to finance growth and internationalisation.