Tuesday, June 15 2010 17:48
Corporate bonds in Armenia: stagnation amid risks
ArmInfo. The corporate bond market in Armenia is currently stagnating amid the global financial and economic crisis (external factor), and the anti-crisis policy of exchange rate regulation of the money authorities (internal factor).
The sharp transition from fixed exchange rate to the floating rate that resulted in the sudden devaluation of the national dram by 20% on March 3 2009 almost “crashed” the dram market instruments that were very sensitive to the interest and currency risks. The national currency lost its investment attractiveness that was achieved thanks to the sustainable appreciation against key world currencies for almost 5 years. In fact, the investors that bought into dram assets through conversion of dollar accumulations suffered tangible losses and became wary of investing in dram instruments. Investing in bond loans became inefficient also for internal investors after rise of the interest rates on alternative instruments, first of all, deposits with commercial banks in terms of the dram and government bonds. Higher interest rates on corporate bonds could lead to debenture market appreciation and, in fact, increase of market risks in the country. All this could result in technical defaults for certain non-bank issuers, especially that most of them issued own bonds as expensive loans refinancing instruments.
Before establishment of the corporate bond market in Armenia, the centralized infrastructure of government bond market was up and running. Placement, secondary trading and loan repayment – all this was already available there. At the early stage of the debenture market development, the yield of government security was almost commeasurable to the yield of corporate bonds and government bonds were considered less risky and highly liquid. This was what necessitated the issue of high yielding borrowings able to attract foreign investors. And it was a success at that moment. Director General of the Capital Asset Management Company, economist Tigran Karapetyan says the Central Bank’s policy is among the measures stimulating issue of corporate bonds. Specifically, 3 years ago the CB practiced rating of enterprises in the private sector and offered participation in repurchase (REPO) deals with such instruments. The economist believes that such practice raised the interest of relevant financial structures, first of all, the banks interested in investing in the corporate debt securities to diversify active operations. Thus, over the short period of its existence (since 2006) the local corporate bond market has passed the way from the narrow and low liquidity transaction floor to the system able to meet the demand of Armenian enterprises in floating capital.
The most intense period for the corporate bond market was the year 2008 when an unprecedented number of issuers entered the market: 9 new issuers with 12 new issues. The bonds of the given issue (ArmRusgasprom) were listed in Abond category and another 6 issues in the Bbond category and admitted to trading at NASDAQ OMX Armenia. The remaining 5 issues were listed in the free market (Cbond category). In general, in 2008 329 transactions with the bonds of 10 emitters in the amount of 2.245.729.672 drams were registered on the stock exchange. As compared to 2006, when trading in corporate bonds was at the early stage and bonds of only one issuer were listed at the exchange, the volume and number of transactions grew 4.7-fold and 7-fold, respectively. The average monthly number of transaction in 2008 totaled 27 and the average monthly volume was 187.1 million drams.
In 2009 yet before devaluation of the national dram in March the corporate bonds of two issuers were listed in the stock exchange: HSBC Bank Armenia CJSC (HSBCB1), Converse Bank CJSC (CVBKB1). After devaluation of dram, the corporate bonds of Inecobank CJSC (ENECB1) were also listed in the exchange market surprising investors with the 9.5% annual yield, which was, to put it mildly, inadequate to the market state and was rather lower than the alternative yield. Despite deepening financial crisis and mass leave of foreign investors, in 2009 versus 2008 the transactions grew 2.2–fold – 719 transactions. The volume of transaction grew 4,7-fold exceeding 10 billion drams (10.545.517.852). The average monthly transactions in 2009 numbered 56 and the average volume of transactions amounted to 688.3 million drams. Experts say that such dynamics in the market is the result of the special financial mechanisms applied by market makers when a limited number of investors are involved in transactions. The major goal of such approach is to make effective repurchase agreements (REPO).
In January 2010 the third-issue corporate bonds of ARARATBANK (ARBKB3) occurred in the market. However, no transactions were made with these bonds by present. In Jan-Apr 2010 85 transactions were made with corporate bonds of 8 issuers in the amount of 1.025.985.303 drams (average monthly number of transactions for Jan-Apr 2010 was 21 and the average monthly volume was 256.2 million drams). As compared to the same period of 2009, transactions fell almost 4-fold and the number of transactions fell 3.7-fold.
The devaluation of the national dram in March could not but affect the yield of corporate bonds. Thus, in 2009 versus 2008 the average yield of corporate bonds was up 1.6 percentage points to 11.8% (versus 10.2% in 2008). The maximum average yield grew 13.8% for 2009 versus 11.4% in 2008 and the minimum yield grew to 11.1% versus 9.6% in 2008. The average annual yield of the third-issue bonds of Valletta Company and Armenian Copper Program after the March devaluation of dram exceeded 17% and 18% respectively, whereas in 2008 the yield of these companies’ bonds did not exceed 11%. In 2010 the yield of Valletta bonds totaled 12.3%. No transactions were made with the bonds of the Armenian Copper Program in 2010.
The average yield of the bonds listed in the exchange market for Jan-Apr 2010 totaled 10.9%, the maximum yield was 11.3% and the minimum yield was 10.6%. The yield of alternative investment instruments, particularly, the 1-year government bonds, totaled 14.3% on May 20 2010, and bank deposits - 13% in average.
By data of NASDAQ OMX Armenia at present the bonds of 7 issuers (7 issues) are quoted: ArmRusgasprom CJSC (HRGAB2), ARARATBANK OJSC (ARBKB3), Converse Bank (CVBKB1), Elite Group CJSC (ELTGB2), Shen Concern CJSC (SHNCB4), Valletta Ltd (VALTB3), and Imex Group Ltd (EMXGB1).
Experts have unanimous opinion that the main reason hindering dynamic development of the equity market in Armenia, including the corporate bonds sector, is lack of long money resources in the country. Long money creation in Armenia depends on introduction of Compulsory Motor Vehicle Liability Insurance (OSAGO) and pension reform. Afterwards, starting 2013-2014 the equity market will function normally. Experts say that in 2010 no issuers – public offerings should be expected. However, private placement is possible.
”Development of the Armenian securities market will take 3-5 years,” says Karen Turyan, Head of ArmSwissbank Investment Department. He believes that the equity market will start developing as soon as there is excess supply of the national currency. This requires recovery of demand for the government securities and reduction of interest rates, otherwise recovery of the corporate bonds market is impossible.
Quite recently the experts of the Armenian bond market had hot discussions on the possible adoption of a law by the regulator to permit issue of corporate foreign exchange bonds, which would resume inflow of foreign capital in the Armenian debt instruments. Some experts believe adoption of such law belated and no longer relevant. They are sure that issue foreign exchange bonds was necessary after the March devaluation of the national dram when the share of deposits in terms of drams slumped amid growing foreign currency deposits. Today such law will cause serious currency risks for local issuers. In this light, the number of companies ready to issue currency bonds must be limited. The list of emitters must comprise also exporter-companies and representatives of the financial sector.
There is another group of experts who are sure that the Central Bank will not initiate the law allowing issue of corporate bonds nominated in hard currency. After all, the Central Bank’s policy aims to promote dram turnover, whereas issue of foreign exchange bonds will contradict the turnover of the national currency and bolster dollarization of the native economy.
Presently, many representatives of the financial and banking sector come out for certain amendments to the legislation. They offer permitting issue of foreign exchange bonds to non-residents only and to create two exchange trading marketplaces for the national and foreign currency bonds. The Central Bank is currently studying the given initiative. However, such decision is hardly possible considering the tough measures of the regulator aimed at the economy dedollarization and restriction of the foreign currency growth in the debit and credit operations of commercial banks amid upward inflation pressure. Probably, slow development of the corporate bond market of Armenia within the coming 1-2 years has no alternative and its reanimation requires liquidation of the economic crisis aftermaths, post-crisis reform of the entire structure of economy and the general financial infrastructure.
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