Lending ... to a Bank?
Corporate bonds are growing in popularity in Belarus
In 2016, deposit rates continue to downtrend, which means that long-term bonds with a fixed rate are becoming an increasingly attractive option. For example, in February forex deposits generated a return of some 4-5% at best, while forex bondholders could get up to 13%
In recent years the securities market, and above all the corporate bonds segment, has been growing pretty well in Belarus. This was facilitated by the government measures to encourage long-term investments and to improve financial literacy of people. What are the pros and cons of corporate bonds as compared to traditional bank deposits? What changes might be expected in the market in the near future?
Instead of a Loan
The corporate bond market came into being in Belarus in 1997 when the first bonds were issued by the joint venture OOO Belparket.
For a while the bond market evolved slowly. For example, from 1998 to 2001 no issue of corporate bonds was registered with the state securities depositary. However, it was back then that the city administrations of Brest, Grodno, Gomel, Minsk and Mogilev launched the first seven municipal bonds. Maiden housing bonds were floated in 2002. Commercial banks came to market in 2003.
The market got a boost after the income tax on corporate bonds was abolished in April 2008, the Finance Ministry said. This measure coupled with other activities such as the easing of the bonds issuance procedures and training seminars helped bolster the bond market.
In 2007 nine entities placed 59 issues of corporate bonds. In 2014 the market saw 456 bond issues by 211 entities. From 1997 to 31 December 2015 the state securities depositary registered 2,722 deals.
As of 1 January 2016, 313 entities raised Br140.2 trillion via 791 bond issues (taking into account exchange bonds). Of this amount banks issued Br65.3 trillion worth of bonds, nonfinancial entities Br61.8 trillion (including housing bonds worth Br3.4 trillion), with local bonds amounting to Br13.1 trillion. The bonds denominated in the national currency accounted for 58.6% of the total amount of offerings, in euro for 11%, in Russian rubles for 1.4%, in U.S. dollars for 29%.
For comparison, as of 1 January 2015 corporate debt totaled Br109.9 trillion (859 issues by 351 entities). According to experts, in H1 2015 the number of deals and the volume of bond issuance decreased primarily due to the end of the period of preferential taxation of income from issued corporate bonds. In March 2016 the head of state signed decree No. 85 extending the relevant tax incentives till 31 December 2017.
According to Belarus’ Finance Ministry, in 2015 the active market players were banks (for example, Belarusbank, Belagroprombank, Belinvestbank, Belgazprombank) and non-financial organizations representing various industries such as the retail chain Eurotorg, supermarket Tsentralny, real estate developers (non-income producing housing bonds)
MAPID, Astodevelopment, Zomex Investment, Triple, industrial enterprises BelAZ and MTZ, and the financial service provider ASB Leasing.
Belarusian companies are gradually starting to view corporate bonds as an additional borrowing instrument. In fact, these securities are considered a more attractive option to raise money than a bank loan. Moreover, bonds can be issued for a longer period. Here we are talking about a more stable resource base for borrowers, said Alexander Mukha, an analyst with the research group BusinessForecast.by.
According to the expert, companies in foreign countries with a more developed securities market often resort to bonds to fund corporate activities and investment projects. For instance, bond issuance in the United States amounted to $1.513 trillion in 2015, as against $1.474 trillion worth of bonds placed in 2014.
The conditions on the U.S. bond market are also attractive for bond sellers, which increases the interest of the private sector in alternative borrowing. For example, the average bond maturity in the United States stood at 15.8 years in December 2015. High-rated companies can raise money at very low interest rates.
For instance, Starbucks dollardenominated bonds offer a yield of 2.1%. There are cases when the yield is 0%. The zero coupon bonds of Goldman Sachs to the total tune of $641 million with the maturity date of 3 February 2045 are a case in point. Such bonds open wide opportunities for business development, while bond-issuing big names attract more and more investors into the market, said Alexander Mukha.
Bonds vs Deposits
The list of Belarusian corporate bonds in circulation is available on the official website of the Finance Ministry. This information can also be found on the websites of banks and companies that float bonds. There is also a single financial market web portal that provides information on the bond market.
Corporate bonds can be acquired directly from banks and companies, and also through the Belarusian Currency and Stock Exchange with the assistance of a broker.
The variety of bond offerings makes this instrument accessible for a broad spectrum of investors. There are two types of bonds: registered bonds (bondholders are registered) and bearer bonds. Bonds are issued either electronically (book-entry) or in the form of paper certificates (physical document evidence). Bearer bonds can be issued only in paper form.
Bonds bear many similarities to deposits. The common features include fixed income (or the procedure for determining it), regular interest rate payments, savings in any currency. However, bonds usually boast a higher interest rate than deposits.
For instance, in 2015 the retailer Eurotorg launched forex-denominated bonds with a yield of 10.5% and 13%. BelAZ offered 10% and 11.9%, and MTZ 11%. The maximum yield on bank bonds in Belarus in 2015 was 7%. The average interest rate on forex deposits with a term of more than one year stood at 5.6% with the best offers at 6-7%.
As for corporate bonds denominated in national currency, last year Belarusian banks were selling bonds with a yield calculated using the following formula: refinancing rate plus/minus several percentage points. Meanwhile, some companies promised a 65% yield. The best returns on national currency deposits hit 50%, while the average rate for deposits with a maturity of more than one year was around 32%.
In 2016, deposit rates continue to downtrend, which means that longterm bonds with a fixed rate are becoming an increasingly attractive option. For example, in February forex deposits generated a return of some 4-5% at best, while forex bondholders could get up to 13% for several years.
For those who have some spare money to make a long-term investment, corporate bonds appear to be more attractive than deposits. Typically, a bond maturity ranges from one to five years. Interest
is paid to the bondholder semiannually or quarterly, in some cases even monthly.
However, taking into account the comparatively long period of maturity, it would be reasonable to ask: is the loss in the mobility of savings an inevitable sacrifice in pursuit of higher returns? Not quite so.
The deposits sector is also affected by changes in the interest rate and income taxes, which encourages people to opt for longterm money, rather than short-term options. If we compare, for example, corporate bonds and irrevocable deposits, the first option, as a rule, gives investors greater flexibility for getting the invested money back in a relatively short time.
This can be done by selling the securities to someone else or to the issuer, if early redemption is possible under the terms of the issue. Bondholders may pledge the bonds, gift them and perform other transactions that are not contrary to the Belarusian laws.
Statistics show that bonds are a popular investment option in Belarus. According to the Belarusian Currency and Stock Exchange, Br117.6 trillion worth of secondary market transactions involving corporate bonds were completed in 2015, including Br34.7 trillion traded via the exchange and Br82.9 trillion sold over-the-counter, which means that the country’s secondary corporate bond market is quite buoyant.