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Corporate bonds: could this underused tool help Ukrainian businesses to expand?

Corporate bonds: could this underused tool help Ukrainian businesses to expand?

Corporate bonds are an investment instrument with considerable potential to become one of the key drivers powering Ukraine’s continued economic recovery. They can provide businesses operating in Ukraine with the resources to fuel development at a time when bank lending remains almost completely frozen. For investors, corporate bonds create the opportunity to preserve available funds and even earn despite the fact that deposit rates have fallen below the level of inflation in the country.

There have been relatively few corporate bond issues so far in Ukraine. TASCOMBANK and Idea Bank have placed corporate bonds, while more recently Ukrposhta and ESKA Capital have joined them. The most attractive securities for private investors have a three to five year maturity and quarterly or semi-annual coupon payments.

A general lack of awareness means that it is difficult for many companies to place their bonds under the current market conditions. These securities have not yet acquired the reputation that they deserve among investors. Large corporations can always resort to investment banks. Medium-sized businesses, meanwhile, might want to consider the option of investing in a public awareness campaign.

Part of the reason for the current failure of the corporate bonds market to take off in Ukraine is the lack of media support. In most cases, the name of the company itself is not enough to guarantee success. On the contrary, it is difficult for both large and medium-sized businesses to generate market interest. At present, the market desperately needs success stories. The more bonds that are successfully placed, the easier it will become. There is little reason to doubt that all these efforts will pay off once people become more aware of the potential this avenue offers.

To cite one specific example, the volume of ESKA Capital’s first bond issue, which started on 15 March 2018, was UAH 30 million, which represents a relatively small amount. This costs the company a little more than the price of a hypothetical bank loan. However, the purpose is not limited to the attraction of financial resources for development. This bond issue should show investors, both private and institutional (insurance companies, pension funds, etc.), that they can invest money in the company. It will be profitable, and all debt obligations will be repaid on time.

Today, rates on corporate bonds in the Ukrainian market can reach 18-20%. This is much higher than the present inflation rate in the country, which last year was 13.7%. It is also higher than the rates on OVGZ, the government debt securities of the Ministry of Finance of Ukraine, which is 14.5%-16.5% per annum. Is Ukrainian business capable of servicing such interest? Yes, if it is already a sustainable enterprise and not a startup. Such companies issue corporate bonds in order to get funds to expand one of their activities. At the same time, the debt burden is distributed among all directions, including those that area already successfully operating.