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Although Romania was hit very hard by the financial crisis, the banking sector did not collapse. However, high unemployment rates, reduced disposable income, high interest rates and the unpredictable leu reduced demand and generated conservatism....

Although Romania was hit very hard by the financial crisis, the banking sector did not collapse. However, high unemployment rates, reduced disposable income, high interest rates and the unpredictable leu reduced demand and generated conservatism. "The banks are still quite cautious and conservative. In terms of security they're quite picky," one partner comments, with another saying: "They're very selective, conservative and have the ability to cherry pick projects. If there is a history of good projects and you can take it to completion, you can discuss. It's different to last year but there is still reluctance. It's moving slowly." Non-performing loans were characteristic of the aggravation of credit quality, and for many banks, all mentioned factors conspired against the sector's productivity. Consequentially, we have seen a rise in restructuring, debt recovery, forced execution and insolvency procedures.

While the trend in restructuring continues, there has been a lack, with a few exceptions, of an underlying market in the sale and purchase of distressed credit assets, despite its potential prospects for buyers. Rather than selling such assets, banks have endeavoured to reorient them, either to their associates or to new companies specially designed for the task. Moreover, we have also seen banks reduce their operational expenses; reassess their expansion plans and even exit Romania.

Nevertheless, while the last year has seen restrained activity from the banks, quiet optimism simmers below the surface. "2011 is completely different, there's a lot of new money," says one partner, adding: "We have eight facility agreements. It's very strange". Fresh money deals are on the rise and there is general feeling that while corporate finance is stabilising, this is not the case for the retail sector or project finance (or anything with a state element). Interestingly, there are also reports of German banks willingness to lend into Romania. This is so, even with German banks that have a real estate component. "Maybe it's a turning point," says one partner.

"Retail is a major issue of the banking system in Romania," says one partner, adding: "What is worrying is that individuals are not willing to take new loans. They prefer to postpone this. It is taking longer for retail to recover." There had been some legislative difficulties with there being a dissonance between domestic and international arrangements. In mid 2010, there was a government ordinance, which had introduced tough measures on banks in order to protect the borrower. Bank associations then reacted and won an amendment, which created conditions conducive for litigation on the lenders. Nevertheless, there have been efforts made with banks being carefully open to retail clients.

In the last 12 months, the Romanian capital markets have not improved. In 2008, the markets suffered profoundly in the wake of the financial crisis....

In the last 12 months, the Romanian capital markets have not improved. In 2008, the markets suffered profoundly in the wake of the financial crisis. The following year was represented by a muted bounce back and in 2010 the markets lay idle. At the end of 2010, the capitalisation of the Bucharest Stock Exchange's (BSE) regulated market was €23.9 billion. To put some perspective, the capitalisation of the only listed foreign issuer, Erste Bank Group (EBS) was €13.7 billion. Trading volumes hit a low point as brokers registered negligible income and even losses, as transactions of professed significance remained a rarity.

Any such activity in the beleaguered market was seen on the equity side. There was only one attempt at an IPO and this proved fruitless. Hidraulica Plopeni intended to sell close to 137 million shares, but only 4,180 of these shares were subscribed to. As a result, this endeavour failed. Regardless, as one partner says: "You can't have a capital market on one issue."

Nevertheless, the most important event on the Romanian capital markets last year was the self-listing of the BSE on tier II of its own regulated trading market. This was carried out on the basis of an admission to trading prospectus without an IPO. In contrast to BSE's listing, one can argue that the most important listing on the market, symbolically, was the administrative listing (without a public offer) of Fondul Proprietatea (the Property Fund) in January 2011. The fund assumes its importance from the special condition that shareholders must be among those dispossessed by the state during communist Romania. It is important to stress the symbolic nature of this listing. "The property fund was listed but it's not a major transaction. It was a technical listing, says one partner, adding: "It became major because the state delayed it. But, when there was the political will to list it the process was easy."

Other developments have been a cause for enthusiasm. In mid 2010, eager to meet its IMF obligations, the Romanian state announced the sale through the BSE of stakes held by the Romanian Government in Petrom, Transelectrica, Transgaz and Romgaz, and the listing of some private companies. These developments proved to be a source of work for law firms. "The state is very committed to these goals," says one partner, adding: "Petrom is extremely challenging and needs a huge team". Unfortunately for the market this deal has stalled in light of recent events in Greece and the US. "The capital markets environment took its toll on the transaction. It's unfortunate that the Greek crisis has made investors weary," one partner says.

Another interesting development and in truth, a regional trend has seen investors' attention divert to the Polish market. "Several investors are considering the WSE (Warsaw Stock Exchange). They're not afraid of the Romanian market but there is more potential in Warsaw and Vienna," one commentator says.

The debt side of the capital markets has been even quieter. "There are some initiatives on the local market. There are some initiatives on corporate bonds but it's not that frequent in Romania," says one partner.

Despite the bleak outlook there is some cause for optimism. The year has seen the creation of a capital markets specific working group. This comprises of nine major banks and investment firms and eight major law firms. The goal of these players is to identify problems and obstacles with the present market as well as coming up with solutions on how to tackle them. Furthermore, the American Chamber of Commerce has also set up a capital markets task force with the same purpose, for the most part.

There is a buoyancy about the M&A market. "We were hoping to see an increase of activity in banking followed by M&A but it happened the other way around," says one partner, adding: "Spring 2011 saw a large number of transactions....

There is a buoyancy about the M&A market. "We were hoping to see an increase of activity in banking followed by M&A but it happened the other way around," says one partner, adding: "Spring 2011 saw a large number of transactions. Small sized and large transactions [some were] several 100's of millions, these are positive signs. There is interest and expectations from sellers." However, others offered qualifications to their enthusiasm. "The transactions are small on value. It's picking up but it's not as much as we'd like," another partner says. Statistics have provided a measure for such subdued optimism. In 2010, the aggregate of the value of deals stood at €1.4 billion. However, it is a salient feature that a rather high number of these transactions ranged between €5 - 60 million. There were only three deals in excess of €100 million being completed.

To elaborate, the small-size deals market developed with the increase in the number of local entrepreneurs who altered their expectations to suit the new market conditions. "Local M&A is very busy and the market was revamped by trade activity," one partner says.

Of late, there have been a number of industry sectors that have been of interest to international investors. "Energy is hot. It's the most interesting with respect to M&A," says one partner. There has been particular interest in renewable energy produced from wind sources and conventional energy produced from oil and gas reservoirs, and natural resources including silver and gold. The state's aim to sell its minority stakes in various utility companies in the oil and natural gas industries, the petrochemical and telecommunications industries can potentially attract some major strategic investors. This could very well directly benefit the Romanian economy. However, this is conditional on the state going through with its plans. "The government might privatise mining and energy but the government is moving very slowly and is using the capital markets for privatising," one partner says.

The pharmaceuticals sector has been subject to consolidation trends. "The healthcare and pharma sectors were very active last year. Although deals were not signed there was a lot of activity," one partner said, with another adding: "Romanian internationals are looking at reinforcing their position, to move from Romanian to [become] international players. Before they worked through distributors," one partner says. There have also been reports of a revival of interest in the banking sector, while real estate is engaged with more discussion. "We'll see properties taken over. It will be more active especially in the second half," one partner said. The TMT sector had some deals too and private equity had "some sort of pick up". In summation, as one partner puts it: "All in all it was a better year than 2009."

The market in project finance is gradually developing. The early years of the recession saw very few projects being financed, however, of late; there has been growing confidence....

The market in project finance is gradually developing. The early years of the recession saw very few projects being financed, however, of late; there has been growing confidence. "Project finance is on the right track", says one partner.

Looking ahead, market commentators have made some animated predictions with regard to project finance. "In renewables, there are several wind projects undertaking development. Most are in the financing stage," says one partner. "Every law firm will have renewables because Romania is jealous of energy generation, it's all in the public domain," says another partner, adding: "Wind is a private initiative, anyone can do it. We have to live with wind because the EU promotes it. People come and do it."

Apart from some activity in hydroelectricity and minimal activity in biomass and biogas, there has been little to speak of in other areas of renewable energy. However, Romania awaits the adoption of longed-for secondary legislation in this field. Should this materialise, the upside is that there could be a rush in the project financing of wind, solar, hydro and biogas. "There was an incentive scheme granted to producers. The law was sent to the European commission. Hopefully the scheme will be in place in September," says one partner, adding: "It has triggered a lot of interest from big, medium and small players. The next six months could be very busy."

Traditional energy has also been subject to some developments. The Cernavoda nuclear power project has stalled and some foreign investors have pulled out. Nevertheless, the market has been buoyed by the progress in the Azerbaijan-Georgia-Romania Interconnector (AGRI), an investment between €1.2 billion - €4.5 billion.

With regard to infrastructure, there has been little progress. "We're badly in need of infrastructure. In 2009 it stopped because the sponsors could not secure financing," one partner states. "We've all been waiting for the infrastructure boom for a decade," another partner adds. Market players have voiced their frustrations that the government has not shown more initiative. "The frustration in project finance relates to PPPs (public-private partnerships). The legislation keeps changing. In PPPs, the legislative changes are not welcome as they are poorly drafted. The legal framework is not good," one partner says. Nevertheless, others have retained hopefulness in light of newly enacted PPP legislation.

One salient feature has been the Romanian government's reluctance to engage with international project finance structures. Instead, transactions have been done on a direct-contracting basis. "Project finance means taking the risk of the project and putting it in the private sector, it never happened," one partner says, adding: "There are road projects but this is done by direct contracting not PFI/PPP, the government takes the risk if the whole thing goes belly up. It's a sovereign guaranteed loan, not project finance." Furthermore, as alluded to earlier, big-ticket infrastructure and nuclear projects stalled due to alleged breaches of contract. Foreign investors have terminated their contracts with the Romanian contracting authority or vice versa. It seems as if there is much work to do in order to get bankable projects in this sector. "There is a discrepancy between the private and public sector; the most active bank is EBRD. Commercial banks are more sceptical in assisting the state in the legal mechanics for PPPs. If the state wants to do PPPs, it's not fully transparent or not bankable. It dies before starting. There are no banks to finance and sponsors won't give full equity," one partner neatly surmised.