Bonds give publicity to a business and increase brand awareness - this is a kind of investment investment, which is very important in a situation where the company’s ambitions involve an IPO and working with institutional, strategic investors.
If a business has reached stable profitability in the last few years, turnover is at the level of 0.5–1.5 billion rubles per year, you can safely look towards bonds.
Let's figure out how everything works.
Who, when and why is it beneficial to issue bonds?
As a rule, if an entrepreneur needs money for development, the first thing that comes to mind is a bank, and this is quite logical. Indeed, the bank can study the company’s business and offer a convenient financial instrument depending on the needs: a line of credit or an overdraft.
In a situation where you are satisfied with everything - the amount of financing, conditions, security - you contact several banks, receive funds and calmly develop your business.
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In a situation where bank funding is insufficient or collateral has run out/is missing, it is necessary to look for alternatives, and here bonds can be the most obvious instrument, comparable in cost, but at the same time more flexible in terms of collateral, without mandatory requirements in terms of collateral and guarantees.
And the point is not that the bank does not want to lend to businesses without collateral, the point is different: banks are subject to strict regulatory requirements in terms of creating reserves for unsecured loans, which negatively affects capital, and even in a situation where the business is profitable and operates Given all the parameters of creditworthiness, it can be very difficult to get a loan without collateral.
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Main advantages of bonds
- It is not necessary to have collateral, which is convenient in a situation where the business does not have collateral.
- You can get a fairly large amount of money at once.
- Issues can be made regularly, thereby obtaining liquidity at the time when it is needed.
- There is no need to maintain turnover on bonds, as banks require.
How to issue corporate bonds
The corporate bond market, which began its development in 1999, is gaining momentum. The economic situation has improved over the past two years. It would seem that with an increase in profits received by companies, their need for borrowed funds will decrease. However, many companies whose financial position has improved are setting themselves increasingly complex challenges that require greater investment.Thus, large businesses, which are called the “locomotive” of the Russian economy, may become ineffective without attracting additional investments, since the depreciation of fixed assets is 60%. Undervaluation of shares does not allow enterprises to attract large funds for the development of production, and they have to look for more and more new forms of borrowing funds. Currently, the replenishment of working capital occurs through the issuance of bills and obtaining bank loans, and long-term projects are serviced through the issuance of bond loans. Both the bill market and the corporate bond market are successfully developing and complement each other. In the medium term, bill programs will be replaced by bond loans as more transparent and reliable. Thus, Russian companies raised more than $1 billion in 2001 by placing their bonds.
Of course, issuing bonds is a more expensive source of borrowed funds for companies. The increase in price occurs due to the tax on transactions with securities, paid by the issuer upon registration of the issue of securities in the amount of 0.8% of the nominal amount of the issue. Issuers are looking forward to a reduction in this tax; discussions about this have been going on for a long time. You also have to pay for the services of underwriters or paying agents, without which there will be no organized placement of debt securities. Other expenses of the issuer - payment for depository services, presentation events, creation of liquidity support funds - amount to 0.2-0.3% of the issue amount. The difficulties and problems that issuers face when issuing bonds, as well as the length of the issue registration procedure, make issuing short-term loans unprofitable.
Summarizing the experience of companies issuing bond loans, we can say with confidence that issuing bonds becomes profitable for large and medium-sized enterprises that are in a good financial position. First, large companies that attract large amounts of financing reduce the costs of issuing bonds. There is an effect of economies of scale. Secondly, firms with an established business and a high reputation face lower agency costs. Thirdly, if they are informationally transparent, the type of activity and the nature of the business are clear, then it is easier to place a bond issue.
Bonds may be issued in an amount not exceeding the authorized capital or the amount of third party security. Bonds may be secured by specific property or may be unsecured loans.
All issues of equity securities, including bonds, are subject to state registration. The procedure for drawing up and registering a prospectus, although labor-intensive, is not complicated. You should not refuse to issue bonds due to any legal difficulties. Almost all of them can be resolved, and professional market participants, including banks, can offer their services as a financial consultant and organizer of an emission project. At the same stage of work, release parameters are determined.
Companies themselves have the right to determine which bonds to issue: long-term or short-term, discount or interest-bearing. Recently, bonds with variable coupon income tied to current market interest rates on GKOs and OFZs or to the refinancing rate have become common. As noted above, the issue of short-term bonds is not entirely profitable for issuers, so the issue of long-term bonds has become popular when the placement conditions are accompanied by an offer in which the issuer guarantees the repurchase of the bonds after a certain period (implementation by publishing an irrevocable offer). Before the state registration of bonds, advertising and placement of securities is prohibited.
More problems are fraught with the direct placement of bonds, that is, the sale of them to investors. From the very beginning of the bond issue, it is necessary to determine the potential circle of investors. And continue to work to increase interest in bonds. First of all, you need to create positive information about yourself, more actively contact the media, and be more open. If an enterprise aims to place its bonds in its region, then it is worth attracting large regional participants in the securities market as underwriters - organizations involved in the placement of bonds.
After the state registration of the report on the results of the issue, the main task becomes the creation and support of the secondary bond market. The secondary market almost never arises on its own, without the efforts of the issuer. Why is it necessary to develop the secondary market? Both the issuer and the investor are interested in a liquid market. The investor must be confident that he will be able to sell the securities at any time.
What is important for the issuer is that the more liquid the security, the lower its yield. And, as a result, with further issues it is possible to place them at lower interest rates. In addition, when issuing bonds with a variable coupon rate, the issuer receives guidelines for the next coupon period. So, if a bond is trading at a price above par, we can say that the coupon rate is assessed by investors as high enough, and there is an opportunity to set it lower. If the price of a bond is less than its face value, it is worth taking measures to increase the attractiveness of this financial instrument.
To maintain a secondary market, it is necessary to have market makers (“market makers”). Market makers issue bilateral quotes for the purchase and sale of securities and carry out transactions with them. In this case, it is necessary to ensure that the difference between the purchase and sale prices does not exceed the permissible spread. It is clear that the market maker must have a certain amount of money to maintain market liquidity. Therefore, an issuer interested in developing the secondary market must create some kind of fund to support liquidity. The volume of this fund is determined by the issuer himself.
As can be seen from the above, it will most likely not be possible to attract a large amount of “cheap” funds using a bond issue. But creating the image of a good borrower with a positive credit rating will bear fruit in the future and will help to further reduce the cost of borrowed funds. You can also reduce the cost of issuing bonds if you choose a competent partner - a professional participant in the securities market (these are banks, investment companies) - who can combine the services of a financial consultant, underwriter, paying agent and market maker in one person.
On January 11, 2002, new standards for issuing bonds came into force. Now the period between the decision on the issue by the board of directors and the submission of documents for registration to the Federal Securities Commission has been reduced from three months to one, which is due to the need to obtain more timely financial information. The new standards, of course, have made the work of issuers more difficult, but will help make life easier for investors. Issuers must disclose information about themselves more fully and conveniently. And the beginning of the year is characterized by the fact that companies sum up the results of the past year, draw up annual balance sheets, and get certified by auditors. And it will be possible to actually issue bonds only in the next quarter.
Who organizes accommodation and how?
You cannot place bonds on your own; you need a broker to organize the placement. As a rule, these are investment divisions of banks from the top 20 or the largest investment companies. You need to contact the bond placement department - you can discuss all the details with its representatives.
Moreover, the organizer will help collect the necessary documents for registering the program and issuing it on the stock exchange.
If the issue is large, there may be several organizers.
When placing, each of them will offer to participate in the issue to their investors, and you will have a better chance of success. If the issue is small, one organizer will be enough.
Why and for whom are bonds issued?
Bonds are securities with the help of which the issuer (the entity issuing them) attracts investment.
They differ from shares in that they do not give the investor ownership rights, and their profit is fixed. It does not depend on the profitability or unprofitability of the company. The document specifies the period after which the issuer undertakes to return the borrowed funds to the investor. The issuer can use the raised money to implement new projects, expand activities, modernize equipment or other purposes. Investors are enterprises, individuals, legal entities, including non-professional stock exchange participants.
Three pillars of initial placement
Step 1. Indicate the period and volume
A bond program can be registered on the stock exchange for a large amount at once, so it is important to determine its duration and volume at the initial stage.
The most common scenario is to register a program worth tens of billions of rubles for a comfortable period of 10 to 20 years and, within the framework of the program, make issues in the volume that the business needs at the moment, and if you really want to, you can enter the market within 2-3 weeks.
Step 2. Set the denomination
In the case of an initial placement, it is better to set a small nominal value of the securities - for example, one thousand rubles. This will make the tool available to all kinds of investors - from private ones with a minimum check to institutional ones (large credit and financial companies that act as intermediaries).
When placing for the first time, it is very important to interest the maximum number of investors, and the minimum denomination will allow this to be done.
Step 3. Determine the regularity of coupon and debt payments
Payment of coupon (interest income) can be made monthly, quarterly and semi-annually, which is very convenient, since each business has its own specifics and the ability to plan cash flow is a big advantage.
As for the principal, it can be paid either during the life of the bonds (usually during the coupon payment period) or at the end of the issue period.
Credit rating
Not mandatory, but an important point is to obtain a credit rating of the issuer. There are many rating agencies, the Russian ones are Expert RA and ACRA - their rating will be enough for the first placement.
The agency will request a list of financial and legal documents from the company, and will also conduct interviews with owners and top managers. The rating period is from two to three months.
This is a simple procedure that will confirm the reliability of the company and give additional confidence to investors.
OFZ: record volumes of placements
The main contribution to the growth of the Russian market was, of course, made by the Ministry of Finance: this year it issued record volumes of OFZ - 5.1 trillion rubles. against 2 trillion rubles. in 2021.
This again changed the balance of power between borrowers in the market: in recent years, the corporate sector has traditionally remained the leader in terms of issuance volumes.
And now approximately 46% of the market (as before 2010) is again accounted for by government bonds, as calculated by the Moscow Exchange. Source: Moscow Exchange
True, in order to sell such a volume of government bonds, the Ministry had to slightly change its traditional tactics. As you know, the key investors in government debt in recent years have been non-residents. For example, at the peak of demand last year, their share in OFZ exceeded 33%. However, against the backdrop of global risk aversion in the midst of a pandemic, foreigners’ appetite for investing in OFZs also expectedly began to decline.
“Objectively, in terms of credit quality, offered profitability and GDP resilience to the current crisis, Russian bonds still looked very attractive compared to other countries with economies in transition,” emphasized Mikhail Nikonov, leading analyst at Expert RA.
“In many ways, this made it possible to prevent a large-scale outflow of foreign investors from Russian debt and smooth out the fall in prices of Russian bonds. Sources: Moscow Exchange, Bank of Russia
And yet, from April to October, the share of non-residents in OFZs dropped from 32% to 24%, returning to the 2021 level. This was largely influenced by the autumn aggravation of geopolitical risks associated with EU sanctions and uncertainty around the US elections.
If in 2021 the share of non-residents at the primary OFZ auctions reached almost 40%, then over the 11 months of 2021 it decreased to 14%.
As a result, the Ministry of Finance, like it or not, had to reorient itself towards the domestic investor.
“Firstly, we understood that in a short period of time we would have to increase our debt to an unprecedented extent. We thought about how to do this correctly in order to minimize risks in terms of our long-term debt sustainability,” explained Timur Maksimov, Deputy Minister of Finance of the Russian Federation, speaking at the XVIII Russian Bond Congress in St. Petersburg. — The second point that worried us was the consequences for the market as a whole. Because when an issuer like the Russian Federation enters the market with a huge amount of debt in a short period of time, this can lead to a sharp increase in premiums both for us and for all other borrowers, including regions and corporations, which we did not want to allow.
In addition, we understood that the Russian market is already in the lower phase of the interest rate cycle: the Central Bank announced that in 2022–2023 it plans to transition to a neutral rate in the range of 5–5.5%. It was difficult to count on the high appetite of domestic investors for interest rate risk in such conditions.
Therefore, it was decided to focus on OFZs with a floating rate, the appetite for them was significantly greater, our key investors - Russian banks, funds - told us about this directly
About 70% of OFZ issued in the autumn-summer period were floaters, which were bought by the largest Russian banks, while the volume of OFZ-PD issue remained at the level of last year.
Sources: Moscow Exchange, Bank of Russia
- This allowed the market not to take on excess interest rate risk. And we were able to carry out the borrowing program that was necessary to support the economy,” says Maksimov. — For now, we have remained at a comfortable level of debt, which we consider sustainable for the Russian Federation, just below 20% of GDP. In 2021, we will likely exceed this figure, and then we will slowly return to the fiscal trajectory that is prescribed to us by the budget rule.
For 2021, according to Maksimov, the budget provides 3.7 trillion rubles. gross debt attraction, of which net - 2.7 trillion rubles. — In the absence of “black swans”, the program looks feasible for us. We hope that we will be able to attract this volume through traditional OFZ-PD. And if the economic situation improves, the program may be reduced altogether.
What else do you need to know?
- The process of entering the bond market is quite long, on average it takes from six months to a year.
- You need to understand that the bond market is a public market, and if before the placement it was possible to conduct business without advertising information about the company's activities, then after the issue it will be necessary to disclose all material facts and financial statements.
- Before the placement of bonds, a Roadshow will be held, that is, a series of meetings with potential investors, during which it will be necessary to talk about the business in as detailed and transparent a manner as possible, building trust in it.
Basic Release Rules
To issue bonds in the Russian Federation, the following conditions must be met:
- The authorized capital must be fully paid. This means that all shareholders have contributed to the authorized capital.
- An enterprise cannot place bonds whose value is greater than the authorized capital or the amount of their security.
- Without collateral, the company has the right to issue bonds only two years after its founding. By this time, two annual balance sheets must be submitted.
Personal experience
On the recommendation of the organizer, we registered a program for 15 years for 10 billion rubles. The most difficult was the first issue, since it involved registering the program, and we did not have such experience.
About nine months passed from the moment I met the organizer to the moment of the first release - this is normal in a situation where the business is young and some of the documents needed to be put in order, as well as materials for the Roadshow to be prepared and the necessary registration steps to be carried out.
The issue took place in September 2021 for 300 million rubles, and we placed it in full, which indicates a well-conducted preliminary Roadshow. Currently, bonds occupy about 30% of the company's liability structure.
Will the market continue to grow?
Next year, the influx of private investors into the market will continue, brokers, banks, management companies and the stock exchange agree.
“We expect not only an increase in the number of accounts, but also an increase in the volume of money that individuals are ready to bring to the stock market,” predicts Igor Marich. — One of the beneficiaries of this process will be the bond market.
Those deposits that were placed by “physicists” at more or less high rates will end. Bank clients will face the problem of reinvestment. By the way, in January-October, Russians have already withdrawn 1.5 trillion rubles from ruble and foreign currency bank accounts and deposits, and by the end of the year, the outflow may increase by another 200–300 billion rubles, analysts from the National Rating Agency predict.
And since the bond market is closest to deposits in terms of risk level, private investors’ money will continue to flow into bonds.
At the same time, low yields in the first tier will more actively push retail investors into riskier instruments, for example, into high-yield bonds. Today this is the most growing sector of the Russian bond market.
According to Expert RA estimates, since the beginning of the year there have already been more than 100 placements with a coupon at least twice the key rate of the Central Bank. Their total volume exceeds 70 billion rubles. At the same time, 70% are issues from companies without ratings. There is catastrophically little information about the risks of such issuers, and placement for them actually turns into a game of betting.
By the way, thanks to the general reduction in rates, issuers of high-yield bonds this year also managed to seriously reduce their borrowing costs: many companies in the SME segment today are already raising funds at the level of rates of ruAA category issuers, which they paid two years ago, noted Expert RA "
— Of course, “physicists” are interested in buying high yields. But the pursuit of profitability is always at the same time a pursuit of risk, warns Marina Chekurova, First Deputy General Director of Expert RA. — As a result, the investor, in pursuit of the rate, runs into a huge number of risks: misselling, low liquidity, high commissions that greatly devalue the price, fraud, default, market drawdowns and, as a result, loss of passive income. All this is not only and not so much an economic as a social problem that can have serious consequences.
According to Chekurova, it is important that the regulator expands its rating coverage areas so that as many investors as possible have an additional source of information about issuers.
However, the regulator is already very concerned about the growing appetite of private investors for risk. So much so that in early December, Central Bank Chairman Elvira Nabiullina, speaking at a special meeting, proposed a radical ban on the sale of complex financial products to private investors, including structured products without capital protection and investment bonds (we talked in detail about how the structured products industry works in the video - ed.
).
It is proposed to introduce restrictions until the testing tool is operational and investors are qualified under the new categorization law.
NFA and NAUFOR have already agreed with the Central Bank that they will try to quickly develop a basic standard for testing categories.
“We will adopt this standard by March 31, 2021,” said NFA President Vasily Zablotsky. “And this will give brokerage companies, management companies and banks the opportunity to develop testing and begin to apply it as early as October 2021, despite the fact that according to the law it was supposed to begin testing only in April 2022.”
Production of bond forms
Compliance with the formalities listed above pushes the bond issuer to the next step: obtaining consent from the Ministry of Finance to produce bond forms, which, from an accounting point of view, are strict reporting forms.
Such consent is required for a documentary form of bond issue.
Uncertificated bonds, of course, cannot have any “blank” expression.
TOP 5 most reliable
According to the ACRA rating, the most reliable among large Russian issuers are:
- Rosneft (Rosneft04). Posted: 10/29/2012. Repayment: 10/17/2022. The current coupon rate is 7.9%. The frequency of payments is 2 times a year.
- VEB.RF (VEB.RF-06). Posted: 10/26/2010. Repayment: 10/13/2020. The current coupon rate is 8.38%. The frequency of payments is 2 times a year.
- Russian Railways (RZD-32). Posted: 07/20/2012. Repayment: 06/25/2032. The current coupon rate is 5.9%. The frequency of payments is 2 times a year.
- Sberbank (SBERBANK-001Р-03R). Posting: 10/13/2017. Repayment: 12/08/2020. The current coupon rate is 8%. The frequency of payments is 2 times a year.
- Transneft (TRANSNEFT-BO-001R-01). Posting: 06/10/2016. Repayment: 06/02/2023. The current coupon rate is 9.9%. The frequency of payments is 2 times a year.
Not far behind them were Gazprombank, Rosselkhozbank, Otkritie Holding, and Gazprom Neft. According to the domestic agency, they best meet the reliability criteria, provide acceptable returns and high guarantees of return of deposits.
Sale of bonds
Bond sales may be [1]
open and
[2]
closed.
An open sale of bonds involves the issuing enterprise concluding a significant number of purchase and sale transactions with a potentially unlimited number of persons.
Such transactions can be concluded both on the exchange and, of course, over-the-counter markets.
A private sale of bonds can take place exclusively on the so-called over-the-counter market, and the number of potential buyers cannot exceed 100.
When open sales of bonds are required, periodic submission to the Department of a special report containing data on the progress of sales.
Publication of information on the open sale of bonds
Everything is simple here. The main purpose of this stage is to attract as many clients and potential buyers as possible.
The list of platforms for placing advertisements can be arbitrarily long. This is all. Let's move on.
