EBRD Launches Pioneering Index-Linked Bonds on Russian Domestic Market
OREANDA-NEWS. October 29, 2010. The EBRD has completed the launch of three index-linked rouble bonds, in one of the first such offerings on the Russian domestic market, raising a total of 14 billion roubles for its local currency lending programme through these eight-year bond issues, reported the press-centre of EBRD.
Index-linked bonds allow certain investors to find assets which better match their liabilities and the successful placement of the three EBRD bonds is a landmark event for the Russian capital market, extending its depth and attracting a new class of long-term investors. It also reflects the EBRD’s commitment to develop local capital markets and encourage local currency lending in all its countries of operation.
These index-linked bonds allow investors to seek a specific and clearly defined risk to boost their return on capital at a time when short-term rouble yields are below inflation levels. Their structure acts as a hedging mechanism which offers investors the possibility of a positive real yield as well as a measure of protection against future inflation.
Today, the EBRD placed an eight-year, capital-protected seven billion rouble bond whose final return is linked to the performance of the Russian Depository Index. This groups the most liquid depository receipts on Russian shares traded on the London Stock Exchange. The Index itself is sponsored by the Vienna stock exchange, Wiener Borse.
The capital is 100 percent redeemable on maturity and the fixed coupon on this EBRD bond has been set at 0.01 percent a year. With this bond, investors are looking to maximise possible gains at redemption on the equities index to which this bond is linked and therefore accept a much lower guaranteed yield than they would demand in a classic bond issue.
On September 28, the EBRD placed two eight-year bonds of 3.5 billion roubles, each indexed to an identical basket of commodities. The structure was similar to today's bond with the capital again being wholly protected, but the potential gain on the price of three commodities -- gold, silver and platinum -- in eight years’ time was in those bonds capped at a maximum of 200 percent.
The coupon on last month’s two EBRD rouble bonds was fixed at 0.015 percent a year.
In the case of today’s third EBRD bond, there is no cap on the maximum profit investors can reap from the potential rise in Russian equity values over the next eight years.
On international markets, such index-linked bonds typically appeal to institutional investors such as insurance companies and pension funds, which tend to hold them to maturity.
In another contribution to the development of the rouble market, the EBRD on October 22 bought 4.5 billion roubles of a 20 billion rouble Eurobond issued by RusHydro, the first by a Russian power sector company.
This investment in a client bond supplements the EBRD’s own fund-raising through the domestic bond market and by doing so the Bank is again helping to attract a new class of long-term institutional investors to Russian corporate debt instruments.
The EBRD has since 2005 raised a total of 78.67 billion roubles through 31 bond issues with an average maturity of 5.1 years. Of this, 39.5 billion roubles were raised on the domestic market through eight issues with an average maturity of 6.1 years.
The EBRD’s local currency lending programme in Russia has since 2002 seen the Bank arrange 128 rouble loans for a total of 95.34 billion roubles, of which 69.7 billion roubles remain outstanding. Of the total, the proportion directly held by the EBRD is 56.74 billion roubles with an average maturity of 7.6 years.
The first two EBRD bonds have already been admitted to trading on the Moscow International Currency Exchange (MICEX) and third bond will follow. The clearing system for all three is the National Depository Centre. The lead manager for today’s seven billion rouble bond is Closed Joint-Stock Company "Investment company "Troika Dialog" and that for the two earlier EBRD bonds was ZAO Citibank.
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