Eurobonds are securities on debt instruments denominated in foreign currency for the issuer.
An issuer is a state or company that issued Eurobonds.
For example, a certain Russian company issues bonds in rubles and dollars.
For dollar bonds, payment of income to holders will be made in dollars. The main feature of Eurobonds is yield and repayment paid in dollars.
The main properties of the Eurobond
Eurobonds on slang brokers are called Eurobonds. She has all the signs of a regular debt paper:
- par value, which is determined by the issuer and is indicated by the corresponding sign on the bonds;
- coupon income - means the amount that is the annual income of the holder of the Eurobonds, the yield paid by the issuer;
- the validity period of the Eurobond and the maturity date determine the time for receipt of coupon income and the return of the face value;
- the market value of Eurobonds may differ from the face value in the direction of increase or decrease, while the coupon income does not change throughout the life of the Eurobond;
- current profit indicators depend on the market value of the Eurobonds, the profit from which is calculated as a percentage as annual in relation to the volume of capitalized funds;
- Another sign of Eurobonds is the yield to maturity, defined as the average annual income as a percentage, provided that the holder owns the security until full repayment (at whatever price the bond is purchased, the holder will receive a nominal value from the issuer).
Investing as a way to save
Eurobonds have become a popular type of investment in the Russian market.
The yield from Eurobonds in Russia may exceed several times the income from deposits.
The minimum price of a Eurobond is one thousand dollars, but on the stock exchange securities are traded in packages (lots) of one hundred, two hundred pieces.
Since 2015, it is allowed to split the sale of lots on the Moscow Exchange, which makes it possible to invest affordable amounts for a wide range of investors. An individual can purchase Eurobonds only through a broker.
The yield of Russian companies' Eurobonds is formed in two forms:
- coupon payments for holders of securities;
- speculative operations designed to change the price of a security and, as a consequence, its market value.
Money to money, or Eurobond yield calculation
Additional advantages that distinguish the yield on securities from bank deposits are:
- increased profitability compared to foreign currency deposits, 4-5% higher;
- the liquidity of Eurobonds, that is, the ability to quickly sell without losing NKD (accumulated coupon income), which makes the bond more expensive;
- if necessary, part of the bonds may be sold;
- fixed income on coupon payments, the size of which is the higher, the longer the maturity of the Eurobond;
- Coupon payment up to twice a year.
In fact, deposits in Eurobonds of Russian issuers and the yield on them are good protection against the depreciation of the ruble, with a sharp drop in the exchange rate you can get profit in rubles
Risks of securities holders
Investing in Eurobonds and yields are not always friendly. There may be objective risks that the holder of securities faces. These include:
- The default, in which the issuer does not fulfill the obligation to pay. For example, in May, a large Russian transport group made a technical default on Eurobonds maturing in 2018, after which its rating fell by a few points, respectively, and bonds lost value.
- Holders of subordinated Eurobonds in the event of bankruptcy of the issuer receive payments last, and therefore the price of securities may fall several times.
- Changes in market prices, which are particularly exposed to securities with a long maturity, when it can periodically sag or rise. The main thing is to withstand the maturity and receive all the money, in case of early sale, you can incur losses.
- The problem of “lottery” is a set of classic investor mistakes related to the purchase of Eurobonds. The problem of “lottery”: to buy the entire Eurobond. This may require, for example, $ 200 thousand. If the client has $ 10 thousand with him, only a part can be sold to him, and ownership of the Eurobond does not arise at that moment. In addition, when choosing such a method of investing, the coupon is inevitably taxed, which the client often does not suspect. This would not have happened with investments in OFZs (federal loan bonds): on the horizon of three years there is the so-called privilege for long-term ownership of securities or, in other words, a three-year privilege.
Investment attractiveness of the Russian securities market
Quotation level and prices for Eurobonds of Russian issuers, profitability and growth prospects of the investment market are expected in the near future in the medium-term Eurobonds sector with basic rates. A smooth growth in the investment of corporate Russian issuers is also planned.
Against the background of reaching a maximum from the long-term and medium-term OFZs and the depreciation of the real estate market, an increase in the yield of Eurobonds of Russian companies is expected. This arouses the interest of individuals and organizations in investing in corporate bonds with a short maturity and a stable coupon.
Three options for the possible acquisition of Eurobonds are available for a private investor:
- Self-purchase through the trading terminal. To do this, you must conclude an agreement with the broker of the exchange, gain access to your personal account, replenish your account and, having access to trading, make investments. Cost from thousands of dollars.
- Purchasing Eurobonds through ETFs (exchange traded funds), this fund includes dozens of large Russian issuers - Gazprom, Rosneft, Sberbank and others. The ETF promotion is available at a price of 1,500 rubles.
- Buy mutual funds that are similar to ETF stocks. The purchase of shares is done through the management company and the conclusion of contracts with it.
Where to see available for purchase Eurobonds?
A list of Eurobonds that are relevant and available for purchase can be seen on the MICEX website (Moscow Interbank Currency Exchange).
It is better to purchase stocks with a minimum lot content. For example, Gazprom’s lot is traded in a hundred bonds, given that one Eurobond is worth a thousand dollars, the buyer will need 100 thousand dollars.
You can also see traded Eurobonds on the broker's website or in the terminal.
Here's what a private investor needs to consider:
- The cost of a package of bonds.
- Choose the smallest package to take advantage of tax preferences and gain a legal advantage by buying the entire lot.
- Find suitable Eurobonds at the rate of one bond - one lot.
- Buy Eurobonds on the IIS (individual investment account), with the possibility of further tax deduction, which is 13% of the amount of investment.
- Take into account the size of commissions and possible taxes, which can significantly affect the profitability of shares. This is especially true for hidden commissions and unaccounted taxes. For example, the yield on the difference in the discount on the purchase and redemption of a bond is regarded as additional profit and is taxed. The total taxation of Eurobonds is 13% of income (excluding Eurobonds of the Ministry of Finance, no tax is levied on coupon income of shares of the RF Ministry of Finance).
- Take your time to buy. Compare all the pros and cons of investing.
- The broker independently withholds taxes, and the coupon to the investor comes less taxes.
Current navigator for Russian issuers of Eurobonds
Eurobonds in Russia can be divided into two main groups.
- State. Government bonds issued in foreign currency. Currently there are thirteen issues with different maturities, face value and coupon payments.
- Yield of corporate Eurobonds of the Russian Federation promises higher than state issuers, from 2 and above 10 percent per annum. However, “second” tier issuers, not the largest banks, offer an increased rate. The more state ownership of the assets of the Russian issuer, the lower the income on Eurobonds, which nevertheless is fixed above the profit from deposits in foreign currency deposits.
Eurobonds are not always issued in dollars, face value can be in euros, and in Swiss francs, Australian dollars, Chinese yuan and other types of currencies. The same type of currency is paid annually.
The difference in annual income of corporate issuers
As already noted, the annual percentage of return on different stocks can fluctuate in quite large ranges. Here are some examples:
- A low yield was set for the Eurobonds of Gazprom Corporation with a par value of 1,000 euros and with the maturity of the security in April 2018. The coupon was paid once a year in the amount of 2.933% per annum.
- Eurobonds “VTB Bank - 40-2018 Euros” with a par value of 5,000 francs - with a coupon of 2.9% per annum.
- Lukoil Corporation promises higher yield on bonds maturing in 2022. The coupon is paid twice a year at more than 6%.
However, for a securities holder , such a return on Russian Eurobonds is still higher than depository placement of money.
Time works to increase income
As a rule, the longer the circulation period of a security, the higher its yield. Thus, the Gazprom Corporation promises an income of more than 7% on Eurobonds with a circulation cycle of 30 years, the face value of the bond is also available to a wide range of investors and amounts to $ 1,000.
In the range of 5-10% per annum, one can find bonds of well-known and top issuers:
- Sberbank-09-2021 is Sberbank's international bonds, the yield on which is promised at 5.717%. Eurobonds with a nominal value of $ 1,000 will be repaid in mid-2021.
Who is the most generous?
Investors are offered and higher returns on securities. Some Russian issuers are increasing both the percentage of annual payments and the number of coupon payments per year.
- Promsvyazbank pays 10.5% of the coupon to the owners of its Eurobonds with a maturity of 2021.
- Otkritie Financial Corporation offers international bonds maturing in 2019 at 10% per annum. Currently, securities can be purchased for 75% of the face value of $ 1,000.
- The highest annual returns are offered to its investors by Tinkoff. The yield on Tinkoff Eurobonds is determined at 14% per annum, the coupon is paid twice a year. The nominal value of the Tinkoff Bank 2018 Eurobonds is $ 1,000; the maturity term ends in 2018.
How not to miscalculate?
After registering and opening an IIS on the MICEX exchange, a broker can offer the investor various investment programs.
These can be multicurrency baskets, as well as various options and a combination of essentially multicurrency deposits, such as futures transactions, with purchases of Eurobonds to protect the securities holder’s investments from currency fluctuations.
Private investors should consider the following:
- The nominal value of corporate Eurobonds ranges from a dollar to 500 thousand dollars. Basically, the cost of the Eurobonds of Russian issuers is $ 1,000.
- The yield on securities ranges from 5 to 10%.
- The issue of lots of $ 1,000 is usually limited, and the choice is not so wide, therefore, an investor who wants to profit from coupons should count on investments of 1.5 million rubles, or better 5, which are multiples of 100 thousand dollars and provide an opportunity holder to have a full lot of Eurobonds.
- The advantage of Eurobonds is their liquidity, but in critical situations it is not always possible to sell bonds ahead of schedule at face value.
- The longer the circulation period of a security, the higher the yield, without waiting for the bond to mature, the investor usually loses income.
- Investments are often associated with the risk of force majeure.
- Individuals can not always buy a lot they like, there are various restrictions that a professional broker will consult about.
Success formula
The Russian investment market is attractive to private investors; Eurobonds, which promise higher returns than deposits on deposit accounts, are especially popular.
In conditions when the real estate market is undergoing crisis and stagnation, Eurobonds are enjoying increased success.
However, the overestimated expectations of a private investor may not come true for a number of objective reasons: a change in the key dollar rate, problems with ownership of a security, bank commissions, and low diversification of securities.
When acquiring Eurobonds, using this tool to strengthen and increase equity capital, maximum transaction transparency is required. Prepare a foothold for a retreat in case of extreme risks.
It is possible that the Russian market offers various instruments for regulating and managing Eurobonds.