ANALYSIS: Features of Kazakhstan bonds market

/IRBIS for PANAROMA, Nov 29, 01/ - On the bonds market of Kazakhstan there is one interesting feature. There is a lot of money in the country. Mainly it is concentrated in two largest institutional investors - banks and accumulative pension funds (APF). Money is invested into securities. However, till now the priorities were government securities (GS) and not securities, where their floatation on the primary market leads to financing of real sector of the economy. Today common shares are not able to make APF interested since they do not guarantee receiving of income on local undeveloped market. APF need securities with guaranteed income among which the most interesting are bonds. On Kazakhstani market of bonds several types of securities circulate. Investments into real sector are provided by corporate bonds and, partly, by municipal debt, since they are mainly used to attract the money to develop specific business programs. Along with them there are GS in circulation - bonds of the Ministry of finance which are issued with the purpose of financing of republican budget and notes of the National Bank as a mechanism for monetary regulation and also bonds of foreign issuers - corporations and international financial organizations (IFO). Banks and APF actively work with all bonds but work differently. The main activity of banks is a crediting. And based on parameters this sphere of activity is actively developed nowadays. Work with securities is becoming secondary priority for them and it's not the main. Moreover, the banks themselves issue bonds and hence finding the source of financing for loans that means they act as issuers and investors simultaneously. The main task of APF, more precisely, PAMC, is an effective investment of depositors' money and mainly through buying securities. The reaction of APF for attractiveness and quality of different bonds is the easiest to study. Therefore, below the accent will be put mainly on APF, more precisely - on private APF (PAPF), since SAPF are not allowed yet to buy corporate securities. At the beginning of November of current year portfolios of PAPF for 59.7% consisted of GS (including for 45.9% - form euronotes of Kazakhstan, by 0.4% - form municipal bonds), for 5.3% - form securities of foreign issuers (including IFO) and for 31.5% - from corporate securities (2.6% - stocks, 28.9% - bonds). Other instruments for considering are not interesting. Functioning limits of investing: not less than 40% should be invested into GS (but at that not more than 5% - into municipal bonds), up to 15% - into non- state securities of foreign organizations; up to 45% - into non-state securities of organizations of Kazakhstan; up to 10% - into securities of IFO. From the comparison of portfolio structure and stated limits it's clear that assets of PAPF "have been reinvested" into GS and mainly euronotes of Kazakhstan. At that limits on investing into municipal bonds and non-state securities of Kazakhstan organizations, providing financing of real sector, have not been utilized fully. According to recent estimate of the National Bank, PAPF are able today to additionally "invest" into shares and bonds of Kazakhstan companies approximately the amount of $100m dollars. What's the problem? First of all, it's necessary to remind that euronotes of Kazakhstan are reliable securities, share of which in portfolios of PAPF should be significant. This is reflected in limits of investing. But even if there are no limits PAMC anyway would prefer these bonds. Due to subjective reasons stated below as well. For last year and a half (from June 01, 2000) the capitalization of euronotes market remains unchanged - USD975m in nominal value. For the same period: capitalization of corporate bonds market increased from $95.3m to $575m (6 times), the market of municipal bonds - from $7.8m to $32.0m (4.1 times); the volume of NSAPF investments into euronotes of Kazakhstan increased from $242.3m to $341.1m (by 40.7%), into corporate bonds - from $17m to $214.5m (12.1 times), into municipal - from $1.75m to $2.8m (by 62.3%), Hence it's seen that the speed of accumulating of investments volume of NSAPF into corporate bonds of Kazakhstan companies leaves behind analogous parameter of euronotes of Kazakhstan and significantly exceeds the growth of capitalization of corporate bonds market. However, events happened in year 2001 let say that Kazakhstan's "bonds boom" has been left behind. Initial issues of corporate bonds transformed into long and let's say creative for the issuers and their financial consultants process, sometimes prolonged for half a year. Initial issues for municipals also represent gradually long train of additional issues at discount. It's enough to remember the first issue of bonds of Eastern-Kazakhstan oblast and the second and third issues of Atyrau oblast. The issuers lose demand and more actual becomes for professionals saying that bonds are not bought out they are sold. In addition to it, according to last issues, the tendency of the increase of the share of buying out by banks and their clients has been noticed, whereas, an activity of PAMC at the sales is declining. Euronotes of Kazakhstan and bonds of Kazakhstani companies at KASE in year 2001 -------------------------------------------------------------------------- Euronotes of Kazakhstan Bonds of Kazakhstan's companies -------------------------------- ----------------------------------- Yield, WA Yield, WA % APR price, Volume % APR price, Volume -------------- KZT for of deals, ----------------- KZT for of deals, Month min max WA $ debt USD m min max WA $ debt USD m ----- ---- ---- ---- ------- --------- ----- ----- ----- ------- --------- I 7.72 9.45 8.42 168.13 61.611 11.01 11.70 11.40 149.02 2.394 II 7.05 8.65 8.13 171.67 85.313 6.69 15.85 11.01 144.70 5.266 III 6.24 8.48 7.58 173.95 77.219 9.15 14.61 10.88 147.17 7.880 IV 5.22 7.95 7.02 174.26 103.249 6.00 14.01 10.21 147.14 7.787 V 5.65 7.36 7.04 172.75 98.893 9.25 11.50 10.36 144.80 4.973 VI 5.69 7.34 6.79 169.25 71.298 7.70 12.50 10.65 148.92 9.674 VII 5.85 7.28 6.87 172.85 50.154 8.60 14.00 9.72 143.94 23.683 VIII 5.71 7.29 6.87 175.51 36.820 8.10 11.50 9.61 148.64 4.040 IX 5.37 7.25 6.64 176.57 22.398 8.10 13.52 10.31 147.83 15.810 X 5.33 7.00 6.69 180.26 20.264 7.88 14.46 10.53 142.72 19.093 XI 4.37 6.85 5.98 174.76 24.881 7.96 13.62 10.43 149.71 10.878 ---------- ---- ---- ------- --------- ----- ----- ----- ------- --------- Total 652.100 111.479 Average 7.26 172.78 10.60 144.50 -------------------------------------------------------------------------- Described trends of current year are especially interesting if to analyze the yield of Kazakhstan's euronotes and corporate bonds which has been formed at Kazakhstan stock exchange (KASE) on made in year 2001 deals (table, data includes the information on buying-selling deals and initial offering). The spread between yield of euronotes and corporate bonds approximately in the amount of 300 points is always presented. In summer corporate issuers made an attempt to narrow it. Orienting on gradually declining yield of euronotes and low coupons of internal GS of the ministry of finance, they offered the market less profitable securities. However, this action didn't succeed. The demand was falling and bonds were sold hardly. In the result in autumn the tendency of the growth of corporate bonds yield accommodated by the increase of deals volume took place. The spread increased again. Moreover, it continued increase due to faster than before decline of Kazakhstan's eurobonds yield. Definite role in the formation of demand for corporate bonds was played by the decline of speed of monetary mass growth. In the second half a year banks suffered from a lack of short-term liquidity and could not support corporate and municipal issuers at initial offerings of their obligations. The deficit of tenge at correspondent accounts of banks brought them to repo market volume of which increased to record values. Increased value of the shortest money and stable demand for them has led PAMC and SAPF to there, for which it has been beneficial to give loans to banks at 5-10% APR per day than invest money into new bonds. New scheme for Kazakhstan had been formed, at which banks had a possibility to use their assets in different high profitable operations that are unreachable for pension market subjects and to support short-term liquidity always at repo market at the expense of PAMC and SAPF. Per se, the banks have received new source of financing using as a pledge their own portfolio of low profitable GS. And funds (more precisely, their depositors) - new source of profit since PAMC and SAPF are able now to profitably and without risk invest short money at liquid repo market. Only ones who lose are issuers that are preparing new issues of bonds. These securities are difficult to sell than before. Another reason, which limits the demand for corporate securities form the side of PAPF, is an unwillingness of funds to quicker decrease euronotes share in their portfolios. Despite very low yield to maturity (in the second issue - 4.5% APR, in the third - 6.2%, in the fourth - 6.1%) these bonds have a big coupon (8.375%, 13.625% and 11.125%, respectively), "pure" denomination in US dollars, highest liquidity and estimated by investors as the most reliable Kazakhstan's obligations. Besides, existing system of evaluation of fund yields is an obstacle for euronotes sale. At the transition to the method of evaluation based on current market value of securities PAMC will pay less attention to the size of coupon payment and more attention to true yield of euronotes to maturity, which is calculated at current prices. The prices have been rising and reach today values, which could not be imagined even a year ago. It's enough to notice that clean prices of notes of separate issues reach now 120% form the nominal. High prices provoke PAMC in conditions of cruel fight of PAPF for depositors to capitalize profit on euronotes which were bought some time at lower than nominal, that means to sell them. Such sales positively affect current parameter of funds yields. But giving way to despair to capitalize this profit PAMC have face the problem of adequate reinvesting, which cannot be realized now. Next month already the parameter of yield of the fund which have sold euronotes declines dramatically. Therefore, PAMC, as a rule, have a weighted strategy in this direction and are not going to sell big volume of euronotes with the purpose of buying corporate bonds. Willingness to sell the euronotes is also stimulated by the inevitability of their price drops. Along with a high investment quality of the instrument, and existing demand even at high prices, the market is "supported" by SAPF, not interested in its collapse yet, judging by the strategy it chosen and the structure of the portfolio. It can buy the euronotes at these prices. But, only now. The situation may change. It is this risk that is typically called by rating agencies as a state regulatory risk - one of the most unpredictable risks. SAPF - is still the state structure. And it is not clear how this structure will behave itself in 2002. PAMC have clear understanding of this and do not deny that the prices of euronotes are "overheated". However, everyone, as it is usually happens, is hoping to be the first to find the moment and sell at the maximum price before everyone else does. But, in any case high coupon rate will force the funds to retain significant portions of euronotes in their portfolios till the maturity. For the reasons mentioned above, now the euronotes are generally more being sold, than bought. In 1.5 year their proportion in PAPF declined from 79 to 46%, and is getting close to the optimal value, but in absolute monetary terms, as it has been said before, the volume of investments of PAPF into euronotes of Kazakhstan increased from $242.3m to $341.1m. The euronotes are being bought in less volumes only. The declining volume of deals also indicate of this fact (table). It means that presently, partial substitution of euronotes to corporate securities (CS) of the Kazakhstani issuers in order to maximize the use of investments limits into CS is hard to do, but still possible. For example, almost critical situation, which is observed now on the world market, is capable of accelerating the growth of investments of our PAPF into corporate securities. As it is known, two major Kazakhstani issuers - NOC KAZAKHOIL CJSC and Kazakhstan Temir Joly NSE - are working on launching their euronotes on the world market. Under current situation these companies will be hardly able to float all planned volume at a low coupon rate. Therefore, the issues are mainly tailored to the needs of Kazakhstani investors. High quality of these issuers, confirmed by the credit ratings, along with their coupon rates which are comparable to those of the euronotes, will stimulate the partial substitution of sovereign debt of Kazakhstan into euronotes of NOC KAZAKHOIL CJSC and Kazakhstan Temir Joly NSE in portfolios of PAPF and lead to the expansion of investments into real sector of the economy of Kazakhstan. Several conclusions can be made from the facts mentioned above. The main one is that it is hardly possible to accelerate the expansion of investments of assets of Kazakhstani PAPF into the real sector by just changing the investment limits set by the normative acts for the PAMC. They seem to be optimal. Even the change in prudential norms for the managers of pension assets, which significantly restrains their investment activities with existing few Kazakhstani issuers, is not a panacea. To the surprise of the specialists of the agency IRBIS, the participants of the pension market do not call the prudential norms as the main halt. The participants need a "big coupon", minimal risks and high liquidity of the instrument. But, there is almost no such instrument. Yet. The mood of the corporate issuer, who has received high credit rating and spent much money (the services of the agencies cost much), is initially set at the low coupon at least for the prestige only. Probably, it has to reconsider its attitude and focus the issue on a certain category of investors, and namely - on the structures of their portfolios. Under current situation it would be advisable to offer an instrument to PAMC, which will make them to sell the euronotes. It will allow them to capitalize on the profit and evade the adequate investment problem. It is also possible that under a high coupon rate they will go for buying the securities at face value or even with a premium. In other words, the issuer and its financial consultant has to market the issue thoroughly on domestic market. The marketing of the issue is applicable not only with the structure of the bonds, but at the time of their introduction to the market. Obviously, mostly the demand can be created by the banks during the initial offering of corporate bonds, unless they are offered in periods of a short-term liquidity collapse of the banks, as it happened several times in this year. Forecasting of the money market indicators is quite real and its results should be used. Moreover, regulatory bodies, which are interested in the growth of the financial market's liquidity, can make the pattern "banks - PAMC" on repo market useless, because this pattern is getting more popular and prevents the money of the pension funds from working for the benefits of the economy. It has been demonstrated above that the structure of the investment of PAPF can be positively influenced by the solution of the old problem of switching the valuation of the returns of pension assets at current market value of the securities. It will save the PAMC from the excessive movements under a tough competition. A complex of bureaucratic procedures of registering each new bond issue rises a serious censure among the issuers and their financial consultants. The commission collected from the issuers at the registration of the securities issue, which is to be abolished this year, also prevents the development of the stock market. In general, the specialist of IRBIS came to a conclusion that the major tendencies on the pension market of Kazakhstan are positive. The market is highly integrated into the country's financial system, and the volume of pension money invested into the real sector is quickly growing. It is senseless to talk about any crisis now. However, it is quite possible to accelerate the growth of investment volumes into the real sector of the economy through the restructuring the portfolios of PAPF in favor of corporate bonds.