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Poland’s Private-Debt Pioneer Survives the Country’s Latest Crisis

Maciej Onoszko
Poland’s Private-Debt Pioneer Survives the Country’s Latest Crisis

(Bloomberg Markets) -- Rafal Lis almost single-handedly created Poland’s private-debt market. In seven years, he built his company, CVI Dom Maklerski sp. z o.o., into a 5.9 billion zloty ($1.6 billion) boutique asset manager.

Then, late last year, he feared it would all come crashing down.

The worst day, he says, was Nov. 20. “My knees buckled as I saw the redemption requests,” Lis recalls in an interview at CVI’s Warsaw headquarters.

The flood of requests from investors, which eventually totaled about 20 percent of CVI’s assets, came as a corruption scandal involving a regulator shook Polish markets still reeling from the nation’s biggest corporate default. Lis was forced to put on hold plans to raise hundreds of millions of euros from new global investors and instead raced to sell liquid holdings. The sale of domestic and euro-denominated bonds and exchange-traded funds enabled Lis to meet the redemptions without holding a fire sale of the financial instruments that make up the bulk of his funds—small private-debt securities, specifically tailored by, and for, his firm.

By the next day, the deluge of redemptions started to slow. “I knew we would survive a month,” Lis says. “And, by the beginning of December it was all fine.”

Lis’s November scare was a rare setback for the holder of the second investment-adviser license issued in Poland after the fall of communism. Returns from the closed-end funds that hold the bulk of CVI’s assets under management aren’t made public, keeping with the norm in Poland. The company’s first open-end mutual fund returned 14.9 percent from inception in April 2016 to the end of 2018. In March, Private Debt Investor magazine in its 2018 awards named CVI the Lower Mid-Market Lender of the Year, Europe, the first time a lender in the Central and Eastern European region had won.

CVI focuses on private debt—financing provided by nonbank lenders—mainly because corporate bonds remain scarce in Eastern European markets. Bank lending dominates in the region. Since CVI’s founding in 2012, the company has taken part in more than 500 private debt transactions in Poland and other Eastern European countries. Most of its funds are co-managed by Noble Funds TFI S.A.

“Rafal is a legend of the Polish capital market,” says Miroslaw Dudzinski, head of Fitch Ratings for Central and Eastern Europe, who first met Lis more than 30 years ago, when they studied economics together at Warsaw University. “He is an absolute pioneer in Poland in terms of investing in high-yield and distressed debt.”

Lis’s private deals, usually from 10 million zloty to 100 million zloty, are made to small and medium-size companies snubbed by banks. Typical examples include €25 million ($28.3 million) for Romanian poultry producer Aaylex Group; co-financing for a mall in Pruszkow, a town near Warsaw; and helping finance a management buyout of Krosno Glass, a Krosno, Poland-based maker of glassware. CVI’s team attempts to control risk by preparing the legal documentation for its deals, which enables the firm to keep close tabs on them. “What I do is outside of banks’ comfort zone,” Lis says. “We are more flexible and have much more appetite for risk.”

Having put the November turmoil behind him, Lis, who turns 48 in April, has resumed efforts to find new investors. The push has taken him to Western Europe and back to Asia, where he worked for Citigroup Inc. and Legg Mason Inc. A native of Poland, he’d started his career in the country in the early 1990s—including a stint building investment-grade credit portfolios for affluent clients at Citi’s Polish arm—and then returned to the country in 2006 to be a managing director at Legg Mason’s local unit.

Lis’s pitch to potential investors highlights the fund’s unique experience in Central and Eastern European corporate debt and the region’s economic growth. Eastern Europe’s economy is expected to grow 2.1 percent this year and 2.5 percent next year, outpacing projected expansion of 1.4 percent and 1.5 percent in Western Europe, according to economist forecasts compiled by Bloomberg.

For overseas investors, the market is relatively limited and little known. Credit market growth has been constrained by the small size of most companies, the dominance of bank loans, and low yields, says Richard Segal, a senior credit analyst at Manulife Asset Management in London. “Lack of investable supply” is the main constraint, he says. More Polish debt would be a “welcome” complement to markets such as Russia, Turkey, and the Gulf, Segal says.

Lis’s November upheaval came after a week of market turmoil triggered by the resignation and subsequent arrest of Marek Chrzanowski, head of Poland’s financial regulator. Chrzanowski stepped down after local newspaper Gazeta Wyborcza reported that he offered favorable treatment to lenders controlled by businessman Leszek Czarnecki on the condition that Czarnecki employed a particular lawyer. Czarnecki secretly recorded the conversation.

The scandal almost toppled Czarnecki’s Getin Noble Bank SA and Idea Bank SA, which were already undergoing restructuring. Lis was hit because Getin offers CVI funds, and investors were dumping anything even vaguely associated with the lender. “We became the victim of a bank run at our main distribution partner,” Lis says. In the end, both banks survived after the central bank lent them a total of 5.8 billion zloty.

The episode reignited concerns about Poland, the biggest capital market in the European Union’s east, first sparked in early 2018 by the collapse of debt collector GetBack SA. The default eroded trust in Polish financial institutions, triggering outflows from mutual funds and halting corporate issuance. “GetBack had a devastating effect on the sector,” Lis says. “It has affected risk perception in the whole market.”

Still, whatever risks the market throws up, Lis can draw on the experience of having emerged from 2018’s sell-off largely unscathed.

“We went through a liquidity stress and made it,” he says.

Onoszko covers credit at Bloomberg News in Warsaw.

(Updates to add fund co-manager in seventh paragraph.)

To contact the author of this story: Maciej Onoszko in Warsaw at monoszko@bloomberg.net

To contact the editor responsible for this story: Jon Asmundsson at jasmundsson@bloomberg.net, Neil Denslow

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