The bond markets of the Commonwealth of Independent States (CIS) are flourishing as companies eschew traditional banking credits and instead issue paper to tap the pool of liquidity in the banking sector and bet on falling interest rates and inflation.

More and more new instruments are being launched as bonds become an attractive alternative to traditional bank borrowing, according to the participants of the 14^th CIS and Baltic States Bond Congress, organised by Cbonds in Limassol on June 8-9.

The major new trend in the Russian bond markets is investors’ renewed interest in regional bonds issues, especially by the Moscow Region, as bank loans continue to decline.

“The number of borrowers in the market of regional bonds is growing, and so are the number of issuers, the number of issuances and the volume of new issuances,” Alexander Kovalev, executive director of Sovcombank, told the conference.

 

 

According to Kovalev, in 2017, about 40 new bond issuances with a total value of RUB330bn (€5.1bn) will be offered on the Russian regional bond segment of the market, while its size is on the rise in both the regional and the municipal segments.

“The decreasing yield and increasing duration signify investors’ growing appetite for regional bonds and their readiness to invest in longer-term financial instruments,” Kovalev observed.

“The year 2016 showed a positive balance of new bonds placed versus those maturing, which was also a sign of issuers’ increased activity and a consequence of growth in the market of regional bonds,” he concluded.

What is driving this growth is the advantages of raising money from a bond issue when set against the more traditional bank loans. While retail loans have begun to recover from an almost complete collapse in the last two years, corporate loans are still in decline. After the significant retail and corporate lending growth in April (loan portfolios increased by 1.0% month-on-month and 1.3% m/m, respectively), the May results showed no additional acceleration: retail loans grew by 0.7% m/m and corporate ones by 0.1% m/m (0.3% m/m adjusted for forex revaluation). Total corporate lending has been falling for most of the last year.

 

 

“Bank loans are being substituted by public debt,” said Gleb Shevelenkov, director of the securities market department at the Moscow Exchange. “Over the last six years, the share of bonds in corporate debt has grown from 31% to 39%.”

He went on to highlight the intense substitution of external debt with internal debt in 2014-2016, which brought up the average share of local borrowing to 77% from 50% in 2010-2013, the cut in the key rate, which is expected to be at 8% to 8.5% by the end of 2017 under an optimistic scenario, and liquidity surplus in the banking system as the main factors making bonds attractive to borrowers.

 

 

According to Shevelenkov, the segment has substantial potential as Russia has 230,000 small and medium-size businesses, but complicated requirements even for a small issuance and high entry cost to public placement are major obstacles.

As the bonds segment develops, new instruments arrive. Moscow-based investment company Volga Capital is launching a new type of bonds.

The exchange-traded coupon non-convertible documentary bearer bonds with mandatory centralised custody provide for the payment of an additional annual income (AI) in the form of a premium for volatility, determined based on the average annual value of the Russian Volatility Index of the Moscow Stock Exchange (RVI).

The maturity period is five years, with a put option of one year and a coupon period of 182 days.

“During periods of increased volatility, the company earns more due to increased disparities in the market,” Stanislav Mashagin, CEO of Volga Capital, said during the presentation of the bonds at the conference.

Meanwhile, in neighbouring Belarus there is still limited interest of the corporate sector in bond instruments due to easy access to credit, said Andrei Philazarovich, director of the investment department at Priorbank

“Lower cost of borrowings via foreign currency bonds, as yields are in the range of 8-10% as opposed to 14-17% on bonds denominated in Belarusian rubles and the Belarusian ruble’s stable exchange rate in recent months are a strong argument in favour of foreign currency bonds,” Philazarovich explained, adding that the ongoing liberalisation of Belarus’ foreign exchange market is set to reduce administrative costs related to foreign bond issue for private individual investors.

In Ukraine, corporate bonds returned 13% on average in 2016, said Sergey Fursa, a specialist in fixed income sales at Dragon Capital.

“Some Ukrainian corporates were very volatile in 2016, with commodities-exposed producers DTEK, Metinvest and Ferrexpo returning over 100% for the year on debt restructuring completion and recovering prices of iron ore and steel,” he added.