Bonds offer quantum of solace in troubled financial times

In a difficult time for the local stock market and as investors' expectations for the coming months get worse due to the financial crisis, investment in fixed-income securities seems a good alternative. Bond issuances are one of the solutions for investors in times of crisis. At least, “investing in bonds is a possibility to maintain the current value of one's financial resources,” Matei Paun, managing partner with BAC Investment, told Business Review.
Currently, 48 listed bond issuances are on the local capital market, and fixed-income securities are registering more and more interest from investors. “We have observed a gradual increase in bond transactions in the last few months. Currently, bonds make up some 25 percent of total transactions on the Bucharest Stock Exchange (BSE),” said Andreea Gheorghe, analysis department director at Intercapital Invest.
Last year, the BSE reported 552 bond transactions compared with 268 the previous year. Yet their value was lower in 2007, due to a lack of large transactions. So, while in 2007 the SSIF with the largest value of transaction from bonds trading reached EUR 375 million, last year the number one SSIF on bond transactions traded just EUR 37 million.
Market specialists believe that the increased investor interest in bonds towards the end of last year was triggered by the need for liquidities, owing to the financial crisis. “I believe that there was much more interest in bonds issuances, because the financial crisis persuaded certain investors to sell these assets due to an increased need for liquidities,” said Marius Pandele, head of research with investment company Vanguard. Consistent yields also lured investors into investing in this financial product. According to market data, bond yields increased significantly last year, along with bank interest rates. “The bonds listed on the BSE have a coupon calculated using an average inter-banking interest rate, which resulted in an increase in the interest rates paid by the bond issuer,” said Pandele.
Paun thinks there are two main risks an investor must consider before buying bonds. “Firstly, it depends who will be the issuer. For instance, bonds issued by the German government or international financial institutions, such as the European Bank for Reconstruction and Development (EBRD) for instance, have an acceptable safety level. Secondly, it depends on the currency in which the bond emission is issued. Personally, I would choose to invest in a bond issued in the Swiss currency (CHF),” said Paun.
Financial analysts are looking at two main bond issuances on the local market. The bonds issued by the World Bank (IBRD09) and BCR (BCR09) attracted in the past year the highest value of transactions.”The positive aspects of these issuances are that both will reach maturity in less than a year. So, even if market prices go down, an investor can choose to keep these instruments achieving a fixed yield, some percentage points higher than the current interest rates for bank deposits,” said Gheorghe. She added: “Currently, the yield to maturity for IBRD09 (World Bank) is some 18 percent and for BCR09 (Banca Comerciala Romana) is 18.6 percent. At current trading prices, these bonds offer attractive yields, higher than the interest rates for bank deposits.”
The IBRD bonds issued in Romania are part of the institution's global strategy to diversify its sources of funding, Catalin Pauna, senior economist at the World Bank office in Romania, told BR. “The Romanian issue was one of the most traded and best performing, in terms of returns, on the BSE last year. During the international financial crisis, the demand for financing from IFIs traditionally increases, and therefore the probability and volumes of such instruments being launched by IFIs on various markets goes up as well,” said Pauna.
Expressed interest in investments in bonds registered on the local market is just one piece of the puzzle of what is happening on the bond markets across Europe. For instance, EBRD representatives told BR that the bank is expecting to raise approximately EUR 3-4 billion of long-term (more than 380 days) funding this year. “This is likely to happen through transactions in different currencies and markets including those of some of the bank's countries of operations. So far, the bank has raised EUR 950 million, and currencies of issuance include the USD, Turkish Lira and Brazilian Real,” said Anthony Williams, head of media relations at the EBRD.
Meanwhile, French bank BNP Paribas plans to issue a five-year euro-denominated covered bond. Commerzbank, Danske Bank, Royal Bank of Scotland and BNP Paribas itself will manage the triple-A rated fixed-rate bond. It remains to be seen whose bond will be next on the local market.

By Dana Ciuraru