PORTUGAL: An Introduction to Capital Markets

Portugal: the Backdrop 

Portugal began 2024 bracing for parliamentary elections, spurred by the resignation of the former Prime Minister in November 2023. While political transitions often raise concerns about policy continuity, consensus on fiscal prudence and other structural policies among the major centre-left and centre-right parties (from which the next government is expected to be appointed) suggests disruption is unlikely.

Meanwhile, GDP growth is forecasted to slow to 1.4% this year (from the 2.3% recorded in 2023), primarily due to persistently tight financing conditions hindering private consumption and investment. However, a boost to individuals’ income through decreased inflation and government support measures aim to counterbalance this trend. Moreover, Portugal's strategic scaling up of public investments is also expected to mitigate the deceleration in growth.

Another aspect to consider is the disbursement of Next Generation EU funds, a key driver of Portugal's growth, is set to accelerate. These funds, amounting to circa EUR22 billion, with over EUR13 billion yet to be allocated, are expected to further stimulate economic growth through infrastructure development and reforms. Despite potential political shifts post-elections, these funds are unlikely to be significantly affected unless there is a failure to implement required projects and reforms.

Portugal continues to be an attractive target for direct investment - the stock of foreign direct investment more than doubled in the past 15 years to reach 70% of GDP in 2022. Portugal's favourable geographical position, educated workforce, and high share of renewables in its energy mix make it an appealing destination, particularly amidst global supply chain reconfigurations due to the ongoing events such as the war in Ukraine.

Portugal's labour market continues to demonstrate resilience, with employment levels reaching historic highs post-pandemic. Although challenges such as labour shortages persist, government initiatives to attract migration and improve education aim to alleviate these pressures.

In terms of fiscal performance, Portugal's external position and government debt continue their favourable trajectory – net government debt has now dropped below 100% of GDP.

Overall, while Portugal faces various economic and political challenges, its strategic investments, fiscal prudence, and resilience in the face of external pressures position it as an increasingly solid and attractive market for players in varied sectors.

The Market  

The uncertain conditions in 2023 and the beginning of 2024 (both globally and domestically) resulted in reduced activity in the Portuguese capital markets. Nevertheless, there is a remarkable success story to flag.

Greenvolt, a company that specialises in producing electricity from renewable energy sources, which consist mainly of forest biomass, but also wind and solar, has been one of the most active and successful players in the Portuguese capital markets during the last couple of years. Active both in the equity and debt segments, Greenvolt had a very successful IPO, a very successful green bond issuance and a very successful rights issuance – all within the span of just over a year.

We are now witnessing the latest chapter of this success story – Greenvolt has become the target of a takeover from a Luxembourg-based infrastructure fund (Gamma Lux), managed by the American investment company Kohlberg Kravis Roberts (KKR).

The Gamma Lux fund formally launched a public tender offer to acquire all shares of Greenvolt. The proposed acquisition, which is expected to be completed by the end of May, 2024, is based upon an offer of acquiring each Greenvolt share for EUR8.3, which is over 10% above the group's share price at the time of launch and represents a premium of 95.3% over the initial admission price of the shares on July, 2021

Although these circumstances will most certainly result in the Portuguese capital markets losing one of its most active players in recent years, the silver lining is its trajectory and the value added to its investors and shareholders, which may well be just another encouraging factor for other potential new entrants in the capital markets.

In the case of debt capital markets, usually a more active segment in the Portuguese Capital Markets front, 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.

Green for Green, Yet Again 

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.

EDP once again played a leading role, accounting for the vast majority of the allocated amount with green bonds. But other players such as REN and Greenvolt, 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 also been active in green securitisation.

This activity has been fueled by the growing demand from private sector investors, but also public institutional investors such as the European Investment Bank. Also, the market expects 2024 to be the year of interest rate cuts, which may come as additional support for the green bond market.

Despite some uncertainty in Portugal for this year, as the amount of placements from the corporate perspective depends mainly on a relatively small number of issuers, the upward trend is expected to continue. However, until this type of issuance is extended to smaller companies that can issue private placements, it will be difficult to see exponential growth in green debt issuances.