Hungary's newly created HVB Mortgage Bank Rt., a subsidiary of Germany's HypoVereinsbank, is slated to become the country's second issuer of mortgage-backed bonds - heralding another step in the slow but steady10-year development of Hungary's fixed income market.

Details of the issue have not been finalized as yet, but the bank's managing director Peter Kocsis said the bank plans to raise a minimum of 10 million deutsche marks by early 2000 through the issuance of five- or seven-year bonds with coupons above the corresponding government rates.

The bank is formulating the offering despite Hungary's inexperience with mortgage-backed bonds, Kocsis said, not only because MBS deals are a traditional way for mortgage banks to raise money, but also because they are less expensive than straight loans from other banks. "The idea is to begin to establish a market for [MBS-style] investments," he said.

The Hungarian market has already seen one MBS issue. Last December, government-owned Land Credit and Mortgage Bank (FHB) debuted mortgage-backed issuance in with a 780 million forint ($3.25 million) five-year bond with a fixed rate of 15.5%. The bank followed up with two more such issues last July.

But despite what might seem to be the beginnings of a growing market - Hungarian authorities are reportedly working on legislation designed to promote MBS further - mortgage-backed issuance is not likely to catch on so rapidly, analysts familiar with Hungary said. The country's bond market is still relatively small, and it will take some more time for it to absorb innovation.

"These [MBS] bonds are a step towards a more sophisticated bond market, but I don't think they are going to be as popular as they are in Germany or other countries," said Peter Cserfalvi, an analyst at the Budapest-based FOCUS Investment Rating Agency. "There is still not a large demand in this country for longer term issues."

Nevertheless, 1999 has been a year of significant progress for the Hungarian debt market. To name the most telling example, the government issued its first ever 10-year bond - a strong reflection, analysts said, of the strengthening of macroeconomic fundamentals in the country.

Meanwhile, Focus, Hungary's only local debt rating agency established in 1998, issued it first corporate rating - a notable achievement, given that just 10 years ago, Hungary was a Communist nation, faced with the daunting task of becoming part of the global market economy, observers note.

Going forward into the new millennium, one of the biggest challenges Hungary faces is the need to deepen its corporate bond market.

Most companies in Hungary, though, still prefer to borrow money from banks rather than issuing bonds, analysts said, because it works out cheaper for them to do so. For their part, the pension funds continue to buy mostly government paper.

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