Lend­ing ... to a Bank?

Cor­po­rate bonds are grow­ing in pop­u­lar­ity in Be­larus

Economy of Belarus - - FRONT PAGE -

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.

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