Bond translated into Russian means “obligation”. A bond loan is a form of borrowing money, which is similar in mechanism to a bank deposit. Any investor has the right to buy bonds of a particular enterprise for a certain period. This means that he automatically becomes a lender (bank) and expects to receive interest for using the loan.

Definition

Bonds are securities. They are issued by the borrower-issuer. True, the borrower must think in advance how he will ensure his solvency.

Ideally, at the first request of the creditor, he is obliged to repay the resulting debt and interest for the use of “investor” money.

Unlike bank deposits, bonds are not insured by the Deposit Insurance Agency. But the income that the investor expects exceeds the profit on deposits. The maximum is about 14 percent per annum.

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Bonds are also issued by government agencies. Among them are the Ministry of Finance and the constituent entities of the Russian Federation. These loans are used to pay off the budget deficit.

Types and forms

Bonds are a stable stock market instrument. It is convenient for conservatives with a solid portfolio on the stock exchange and for beginners. The yield of the issue is set depending on the number of attracted investors.

In this case, the lender should take into account two factors:

• During the term of the contract, only interest is paid for the use of money;
• The value of the security is subject to compensation at the end date of the contractual obligations.

Any borrower who seeks to attract large amounts of money knows what a bond must be like in order to be redeemed.

Of interest are those securities that are issued taking into account the requirements:

• For a minimum period of up to one year, 1.5 years.
• Registered paper.
• High quality printed document with watermarks.
• Registration was carried out on the stock market and with the Securities Commission.
• There is a unique number.
• It has a certain advantage: before the issue, the value of the enterprise’s property is assessed. If the organization is able to “repay its debts” and “increase its capital,” then a positive decision is made.

By date

Bonds are repayable money. Payment terms are chosen by mutual agreement. Finance can be returned along with interest on the day the contract ends.

The bond can be resold during the holding period. There are no restrictions on the period of use: it is established by agreement. But due to the instability of economic situations, the longer a paper is issued for, the less interest it arouses.

Medium term

Not all securities are trustworthy. But large Russian manufacturing enterprises and states, constituent entities of the Russian Federation have the right to issue securities with a holding period of 10, 20 years.

In Germany, medium-term government bonds issued for a period of up to 4.5-5.5 are common. years. The “running” name is Eurowobbles. They are traded on the Yurex exchange. The income is no more than 6 percent per annum.

State

The Ministry of Finance of the Russian Federation is responsible for the issue (issue) of government bonds. People call them OFZ, or federal loan bonds. The repayment terms here are set depending on the needs of clients (investors).

The official issue of securities is provided for a period of up to one year and with a validity period of 25 years. The average yield is from 8 to 10 percent per annum.

Municipal

Securities, the issue of which is organized by constituent entities of the Russian Federation, are usually designated as municipal. For example, Moscow and the Moscow region have succeeded in this “skill”: they actively distribute “Moscow Bonds” and “Moscow Region Bonds”.

Their purpose is to finance the budget deficit. Profitability on the stock market for this type is determined to be up to 13 percent.

Commercial

According to statistics, lenders are more attracted to corporate obligations, since investors tend to expect higher returns. Fortunately, large Russian companies are engaged in issuing securities.

Among them:

• Gazprom;
• Rosneft;
• Sberbank of Russia;
• Lukoil;
• Norilsk Nickel.

Large giants guarantee “investors” profitability of up to 20 percent per annum. At the same time, small industrial associations and medium-sized banks have low indicators: from 8 to 15 points.

At the same time, the investor assesses the risks when investing funds independently.

Domestic

Securities that are issued in Russian currency are called domestic bonds. Their release must also be registered in the Russian Federation, and sales are carried out in accordance with 173-FZ of 2003.

Video: Release Stages

External bonded bonds

The issuance of global certificates of this type has been organized on behalf of the Ministry of Finance since 2013. The number of securities currently amounts to 7,500 units.

Both residents and non-residents of the Russian Federation can become bondholders on special terms:

Advantages and disadvantages

The advantages of issuing securities are usually assessed in comparison with shares:

Municipal and federal bonds have the lowest risks. But there is no need to talk about profitability here. If an entrepreneur is ready for risks and high interest rates, then he is recommended to enter into an agreement with corporations and large Russian enterprises.

Government loans are not insured, but have a reliable guarantor. This is the form of the Government of the Russian Federation, which is pursuing a policy of consolidation and unification. In addition, with a sharp decline in the profitability of bank deposits, obtaining securities from the state is not only prestigious, but also profitable.

As a source of financing

Bonds help finance various sectors of the economy and the social sphere. Thanks to this source of borrowed funds from investors in Russia, along with the oil and gas complex, telecommunications and the banking sector took leading positions. Examples: VTB24, VimpleCom.

Since the beginning of 2011, Russia has become a leader in the volume of corporate bonds: the total value of packages of securities amounted to 3 billion rubles. Large issuers in the metallurgy and electric power industries also emerged as leaders.

Although bank deposits remain a priority, the debt securities market is developing at an accelerated pace. State and municipal bond loans play an important role in this.

Bond loans issued by the Government of the Russian Federation are intended:

• to cover budget deficits at various levels;
• to finance social programs;
• to implement housing construction plans;
• to increase the money supply and curb inflation processes.

Prices and emissions

The decision to issue securities is made independently by the organization. The issuer is obliged to contact the organizer, pay for the services of the depository, and pay off the exchange commission upon placement. Most of the funds are spent on marketing costs.

Bond loans are to some extent a competitive way of raising borrowed funds with bank lending and quite often replace bank loans, as evidenced by the processes of securitization of financial markets. If the accounting and tax rules for transactions with borrowed funds are the same, then companies will choose the debt instrument where the total costs of raising capital and servicing borrowed funds will be lower. This is evidenced by the Russian experience of attracting borrowed funds.

Advantages of bond loans. Given the high cost of credit resources, companies seek to directly address investors, for which they resort to issuing securities, which allows them to obtain cheaper funds than bank loans.

Rice. 10.6.

In Fig. Figure 10.6 shows the dynamics of changes in the weighted average yield of Russian corporate bonds over the last decade. In the pre-crisis period, the yield was 7-8%; during the crisis, money rose sharply in price, and the yield exceeded 20%.

By mid-2010, profitability reached pre-crisis levels. However, due to the worsening geopolitical situation, interest rates began to rise and in August 2014 reached 9.9%. However, the average corporate bond yield is about 5% lower than the average loan interest rate.

The figure shows that during the crisis, interest rates rose sharply. When the acute phase of the crisis has passed, a decrease and stabilization of interest rates is observed.

The strengthening role of bonds in the debt market is due to a number of advantages of bond loans compared to bank lending.

• 1. Attracting resources from a wide range of investors. This allows the bond issuer to attract a much larger amount of funds. The equity capital of most banks is low, and they do not have the ability to issue a large loan to one borrower.
• 2. Independence from a single lender. When issuing bonds, an enterprise will not face a situation where, as a result of a deterioration in its financial condition or a change in the policy of the creditor bank, it refuses to continue lending to the enterprise. If the bank refuses to allocate the next tranche, the company will have a financing deficit for the investment program. She is forced to urgently look for funds on the financial market, which in some cases is quite expensive. By issuing bonds, an enterprise receives financial resources from numerous borrowers, and the deterioration of the financial condition of one of them does not in any way affect the implementation of the investment program.
• 3. Attracting resources for the long term. Bank loans are usually issued for a short period. This is due to the fact that banks have short-term liabilities, i.e. The period for which banks attract funds in the form of various types of deposits is very short. The average period for raising funds for time deposits in Russian banks is less than 1.5 years. In such a situation, it is difficult for banks to issue loans for long periods. The inability to obtain long-term financial resources in the banking market pushes companies to issue bonds. In Russia, the average maturity of corporate bonds is currently about four years. Companies also practice issuing bonds for longer periods (up to 10-15 years).
• 4. The ability to manage your debt. Bonds are market debt, i.e. securities that can be traded on the secondary market. This allows a company to manage its debt by buying bonds when the company has available funds and market prices are low, and selling them when there is a need for cash or market prices are high enough. Through operations in the secondary market, the issuer in some cases manages to significantly reduce the cost of debt servicing. In addition, companies can issue bonds of various types and types (with a floating coupon rate, with the right of early repayment, with the possibility of converting bonds into shares, etc.).
• 5. No additional conditions from creditors. The issuance of a bank loan in many cases is accompanied by a number of additional conditions on the part of the bank. The company may be required to transfer all payments through the lending bank, provide collateral, or be subject to other restrictions. When issuing bonds, the number of investors is large enough that each of them cannot demand any exclusive conditions for themselves.
• 6. Formation of a public credit history , creating prerequisites for the placement of other securities. The reputation of an enterprise is one of its most valuable assets. The ability to pay off obligations stipulated by bond loans in full and on time is immediately visible to all participants in the financial market, which increases the reputation of the enterprise.
• 7. Obtaining market quotes for your obligations. When placing its bonds and during their circulation on the secondary market, the company has the opportunity to find out the real price of its obligations, as they are assessed by other market participants. In the future, the enterprise gets the opportunity to focus on these figures when obtaining loans and other forms of borrowing.
• 8. Securities provide convenience for investors in placing financial assets. A bond, unlike a bank deposit, has the property of liquidity. When an investor invests money in purchasing bonds, it is easier for him to return these funds without waiting for the bonds to mature. To do this, he can sell bonds on the secondary market. When completing a transaction, the buyer will pay the owner of the bond not only its cost, but also the interest accumulated during the holding period. If funds are withdrawn from the deposit early, the investor incurs losses in the form of lost interest.

The indicated advantages of bond loans compared to bank lending contribute to the fact that bonds begin to play a decisive role in the total volume of investment financing.

The securitization process is global in nature and covers both developed and developing markets. This process originated in the USA and is developing at a rapid pace. If in 1980 in the United States the share of borrowed resources attracted by non-financial companies through the issue of bonds was only 44%, and the majority (56%) came from bank loans, then at present the picture in the credit market is completely opposite. Thus, in 2011, the share of bond loans accounted for 66%, and the share of bank loans decreased to 34% (Fig. 10.7).

Bank loans? Debt securities Rice. 10.7. Structure of the US debt market

The process of securitization is also developing at a high pace in other developed countries.

In the Russian financial market, the volume of corporate bond issues is constantly increasing and growing at a faster pace than bank loans.

At the beginning of 2014, the volume of corporate bonds issued by companies circulating on the Russian market amounted to more than 5.3 trillion rubles. This is more than 10 times the volume of the corporate bond market in 2006. As of January 1, 2014, there were 1,036 issues of corporate bonds of 355 Russian companies in circulation.

Bond loan parameters

When issuing bonds, the issuer determines the parameters of the issue, the main ones of which include:

• volume of bond issue;
• par value of the bond;
• the amount of income paid on the bond;
• frequency of income payments;
• the period until the bond matures.

These parameters, along with other indicators, are indicated in the prospectus.

Based on the fact that when issuing bonds, a loan relationship arises between the issuing company and investors, the company must take into account the national specifics of legislation and regulations related to the issue of bonds.

• 1. According to Russian legislation, the bond issue prospectus must indicate final term of the bond , upon the occurrence of which the company buys back its bonds from investors, paying them the face value of the bond. However, world practice knows the so-called perpetual bonds, which do not have a final maturity date. A classic example of a perpetual bond is the “British Consolidated Bond” (British Consolidated Bond), issued in Great Britain in the 19th century. without specifying the maturity date. In addition to the UK, some countries also allow the issuance of perpetual bonds. It should be noted that the issue of perpetual bonds is an extremely rare case. This is an exception to the rule rather than a general pattern. In Russia, perpetual bonds are not issued.
• 2. Bondholders as creditors have priority in receiving income compared to shareholders. When issuing bonds, the coupon rate is determined as a percentage of the bond's face value and the frequency of their payment. For example, but bonds with a nominal value of 1000 rubles. A 10% income is established, payments to which are made twice a year. This means that during the year the investor will receive an income of 100 rubles. (10% of 1000 rub.) in two payments of 50 rub. every. The priority of bondholders in receiving income is manifested in two aspects. Firstly, payments within the established standard are represented as part of the enterprise’s costs and are included in the cost price. This fundamentally distinguishes the terms of payments on bonds from current payments on shares. Dividends are paid on shares, the source of which is the company's net profit remaining after taxes. If the company has no profit, then there is no source of dividend payment. Secondly, payments on bonds are the obligation of the issuer, which he assumed by issuing bonds into circulation. If the issuer fails to pay the coupon income, bondholders can claim the amounts due to them through the court. Thus, bondholders are protected to a greater extent from the point of view of receiving current income than shareholders.
• 3. Availability of bonds by owners the right to priority satisfaction of their demands compared to shareholders upon liquidation of an enterprise. As a rule, the question of liquidation arises when a company is at the stage of bankruptcy. In case of bankruptcy, the company is obliged to pay off all creditors (with employees of the enterprise for wages, with the budget for taxes, with other creditors). Bondholders are recognized as one of the company's creditors. Therefore, in the event of liquidation of the enterprise, it will repay all debt but current payments for the past period and pay the face value of the bond. If the company does not have enough funds in its current account to satisfy all the creditors' claims, then the company's assets (buildings, machinery, equipment, etc.) are sold. The company pays off its obligations using the proceeds. Settlements with shareholders are made after repayment of debt to all creditors. Therefore, it is quite possible to imagine a situation where shareholders receive nothing.

Issuers issue a variety of types and types of bonds, each of which has specific properties. The next part of this chapter is devoted to consideration of the main types of corporate bonds.

Mortgage (secured) and unsecured (mortgage-free) bonds. To study and characterize certain types of bonds, all their diversity can be presented in the form of separate groups. Depending on what classification criterion is used as the basis for the grouping, several types of bonds can be distinguished.

According to the collateral method, bonds are divided into:

• for mortgages (secured);
• unsecured (mortgage-free).

Investors, when purchasing bonds, lend to the issuer, and thereby take on credit risk, which is that the borrower may not repay the debt due to his insolvency. To reduce credit risk and make the issue of bonds more attractive in the eyes of investors, and therefore cheaper, companies issue bonds secured by the pledge of some property.

Along with this, companies widely practice issuing unsecured bonds, which are not backed by any assets. These bonds represent direct debt obligations of the company, the fulfillment of which is guaranteed only by the general solvency of the enterprise.

Mortgages (secured ) bonds are issued by an enterprise on the security of specific property available at this enterprise (buildings, machinery, equipment, etc.).

The value of the assets pledged must exceed the cost of the bond issue so that the pledge holder has a certain reserve to ensure the safety of investors. The discount amount is usually 25-30%, and in some cases reaches 50%. The size of the discount is characterized by the quality and reliability of the pledged property: the more reliable the collateral, the smaller the discount. Depending on the type of security, there are several types of mortgage bonds.

Mortgage are called bonds issued on the security of land or real estate. These bonds are considered the most reliable, since these objects do not lose value over time. Therefore, by mortgaging real estate, a company can attract financial resources in an amount close to the value of the collateral.

By bonds with variable (floating ) collateral machines, equipment, and materials act as collateral. The term “variable” (floating) mortgage emphasizes that the value of the pledged property is subject to significantly greater fluctuations than land or real estate. Even if machines and machines are not used and are stored in a warehouse, they still depreciate in value, as they become obsolete. Therefore, variable-mortgage bonds are considered less reliable than mortgage bonds, which is reflected in a greater discount from the value of the collateral.

Bonds secured by securities secured by shares, bonds and other securities owned by the issuer. The value of the collateral is determined by the market price of these securities. Depending on the quality of the pledged securities, the amount for which bonds can be issued is determined.

Unsecured (mortgage-free ) bonds (unsecured bonds or debts) [ are not secured either by the pledge of specific property or by cash flows to the underlying assets. Claims of owners of unsecured bonds are satisfied in accordance with the general procedure, along with the claims of other creditors. The actual collateral for such bonds is the general solvency of the company. As a rule, large and well-known companies with a high rating and a good credit history resort to issuing unsecured bonds. The name of these companies already serves as a money return guarantee.

Interest payments on bonds. Depending on the method of generating income, coupon and zero-coupon bonds are distinguished.

When issuing bonds, the issuer sets the rate of return as a percentage of the face value. Historically, when bonds were issued, they were accompanied by coupons indicating the percentage of income and the date of payment of income. The owner of the bond presented the bond with coupons to receive income. The owner of the bond was paid the income due to him, and the coupon was cut off (cancelled). This is where the term “coupon clipping” comes from. By coupon bonds With the beginning of the coupon period, funds are accumulated, which are then paid to bondholders.

Discount (zero coupon ) bonds - These are zero coupon bonds, i.e. no interest is paid on them, and the owner of the bond receives income due to the fact that the bond is sold at a discount, i.e. at a price below par. The issuer repurchases bonds at par value, as a result of which their owners receive corresponding income. In fact, when issuing discount bonds, the issuer refers the payment of coupons to the end of the bond's term and pays them along with the amount of debt.

1 Term debentures used in the United States to refer to unsecured bonds. In the UK, this term has exactly the opposite meaning and is used to describe covered bonds.

Bonds with fixed and variable coupons. Depending on how the coupon rate is set, bonds with a fixed and floating (variable) coupon are distinguished.

Coupon bonds can be issued with a set fixed interest rate, the income on which is paid continuously in an unchanged amount throughout the entire circulation period of the bond. Establishing a fixed interest rate is possible in a stable economy, when fluctuations in prices and interest rates are very small. In conditions of high and sharply changing interest rates, establishing a fixed nominal yield is fraught with high risk for the issuer. If interest rates decrease, the issuer will have to pay investors income at the rate fixed when the bonds were issued.

Therefore, to avoid interest rate risk, issuers turn to floating rate bonds. In the context of high interest rates and in anticipation of their reduction, companies preferred to issue bonds with a floating interest rate tied to some indicator reflecting the real situation in the financial market.

In Europe, the variable coupon value is often tied to the rate LIBOR - rate on the London interbank loan market, characterizing the cost of attracting financial resources for first-class borrowers. Bid LIBOR fixed daily at 11 a.m. for major world currencies for periods of 1, 2, 3, 4, 6 and 12 months. The coupon rate is set as the rate LIBOR plus (minus) a certain number of basis points. One basis point is equal to 1/100%. For example, the coupon value is set to the six-month rate LIBOR in US dollars + 225 basis points. If the six month rate LIBOR in US dollars is 3.53%, then in this case the coupon rate is 3.53 + + 2.25 = 5.78%. The coupon rate calculated in this way is fixed for a period of three or six months, after which it is revised based on the rate LIBOR on the date of revision.

Given the unstable economic situation in Russia in the 1990s, issuers widely use floating-rate bonds. In 1995, for the first time in Russia, federal loan bonds and state savings loan bonds with a floating coupon were issued, the yield of which was tied to the level of yield on government short-term bonds (GKOs). In 2000-2001 many Russian companies issued bonds with a variable coupon, the size of which was determined depending on changes in any macroeconomic indicators: inflation rate, money market yield, exchange rate, etc. As the economic situation stabilized, companies switched to fixed coupon rates. Before the crisis, more than 90% of bonds were issued with a constant coupon.

The financial crisis that erupted in 2008 sharply increased the instability of financial markets, and therefore the issue of bonds with a constant coupon rate became subject to significant risk. In 2009, the share of variable coupon bonds increased sharply and reached 31%.

Income on coupon bonds can be paid quarterly, semi-annually, or annually. In countries where Anglo-Saxon law predominates (USA, UK, Australia, Canada), coupons are usually paid twice a year. In European countries, coupon payments are usually annual. In Russia there are not yet strict established rules for the frequency of coupon payment. Coupon payments are made both quarterly and semi-annually. Recently, Russian companies are increasingly issuing bonds with semi-annual coupons.