Банкеръ Weekly



There is no doubt that the Bulgarian credit market is growing rapidly, but the market of bank bonds is expanding even faster. For the one year between June 2003 and end-June 2004, the total amount of debt bonds issued by the credit institutions has grown by 173% reaching BGN354.9MN. That is how this financial instrument became one of the banks' major source of funds attracted for periods longer than two years.The Bulgarian financial and crediting system has always suffered from chronic insufficiency of money ceded for management longer than two years. Experts from the Bulgarian National Bank (BNB) Bank Supervision Department as well as those from the international financial institutions point out there is great discrepancy between the maturity of most bank loans and the terms that banks have to pay back funds attracted from clients. Unfortunately, the BNB statistics is still being updated quite slowly, so the most recent data on the credits maturity and the redemption term of attracted funds date back to the end of 2003. Still, BNB experts say the data have not changed considerably for the past six months of 2004. Considering the latest statistical figures, just 9% (BGN1.3BN) of the funds that banks have attracted from individuals and companies are to be paid back in more than one year. The remaining 91% (BGN13.2BN) have up to one-year redemption term. At the same time, credits launched for more than one year amount to BGN6.2BN and account for some 48% of the total amount of loans launched.Until 2003, banks used to launch long-term credits on account of their net worth, the credit lines they were taking from foreign banks, as well as the so called residual balance on deposits (regardless of the deposit term there is always a certain constant amount that the customer does not draw). The total amount of the residual balance of the bank sector is some 20% of the whole amount of deposits on the average. Meanwhile, the interest in long-term credits - consumer, home, and investment ones, is constantly going up. That is why the banks tried to provide an additional amount of long-term attracted funds by starting to sell bond issues. By the end of 2002, there were seven banks that had issued debt bonds and their total issue face value reached BGN57.27MN. In 2003, nine credit institutions launched bonds of BGN224.18MN total face value. Bank issues totalling BGN73.47MN have been offered on the market for the first six months of 2004.Being an instrument for attracting funds, the debt bondshave one great advantageThey are paid off on the maturity date. On the other hand, deposit holders may ask their money back before the expiry date of the deposit and the bank has to return it. It means that bonds allow for making better plans of the amount available for launching long-term loans. That is why the credit institutions will keep increasing the amounts of bond issues, even though from July 1 they have to allocate 4% of the resources they attract as lowest reserves required. From the beginning of 2005, the amount of these reserves may grow to 8% of the attracted funds. According to some bank managers, the total amount of issued securities will reach BGN1BN within a year. First, because investors are interested in them. It is a fact that the yield of the bank bonds exceeds the returns on deposits. And second, because banks have already proven that they are proper payers and face no problems with the redemption of these bonds.Up to now First Investment Bank (FIB) isthe leader in terms of bonds sold on the foreign marketOn September 29, 2003, FIB sold three-year bonds for EUR40MN. Moreover, it did it on the Luxemburg Stock Exchange. It was FIB's debut on the international stock markets and also made the bank the first and only one credit institution in Bulgaria to be listed on a foreign stock exchange. In spite of the too high yield FIB agreed to pay on them, 8%, it is more important now that the bank demonstrates correctness towards its bond holders. Only now can it rely on future foreign financing at much more favourable conditions. However, being listed on the international markets does not necessarily mean that the bank has forgotten about the Bulgarian Stock Exchange (BSE). FIB was the second institution following the Bulgarian-American Credit Bank (BACB) to launch mortgage bonds. It was also the first one to redeem an issue - the two-year debt bonds amounting to EUR5MN which FIB sold on October 25, 2003. The bank regularly paid the 7.8% annual interest on them as well as the principal on the maturity date. As the BANKER weekly predicted, a new issue replaced the successfully completed old one. On November 12, 2003, FIB sold mortgage bonds worth EUR5MN. They provided much more favourable conditions for the bank. The second issue has a five-year redemption period and offers a 7% annual interest. A month and a half after the bank announced the issue, it launched these bonds on the BSE too, where they are subject to secondary trading.Slightly following FIB's European debute, Raiffeisenbank (Bulgaria) soldthe biggest bond issue on the Bulgarian marketOn October 10, 2003, the bank launched its only (so far) debt bonds worth USD32.104MN. Raiffeisenbank (Bulgaria) managed to sell the bonds at extremely profitable conditions despite the cheap US dollar and the low interest rate offered on US securities by the Federal Reserve. Raiffeisenbank bonds are payable in three years and provide a 4.75% annual interest.Strange calm surrounded another big eminent -BACB, which has already sold BGN47MN worth bondsBut the situation may change soon. On August 1, the bank will have to pay the principal on its debut issue amounting to EUR3.242MN. Normally, it compensates the money spent on certain bonds by launching new debt bonds.BACB launched its second issue worth EUR5.5MN on March 28, 2002. It has a three-year redemption period and provides a 7% interest rate.Ten months later - on January 31, 2003, BACB launched a third mortgage bonds issue amounting to EUR10MN. Again, the face value of the bonds is EUR1,000. The interest is 7%, too, but the redemption term is much longer - five years.BACB's latest issue was launched on August 6, 2003 and amounted to USD6MN. The bank used it to give an example to the market by being the first one to take the risk and sell unsecured bonds. Although BACB did not offer guarantees for the bonds except for its proper payer image, it managed to sell the three-year bonds and obliged to pay a 5.87% interest.On July 12United Bulgarian Bank (UBB) will become the leader in terms of mortgage bondsThe bank is going to issue bonds worth BGN40MN which will be traded on the BSE. Considering that the bonds are in Bulgarian levs and are payable in 5 years, it can be said that the conditions at which Bank Austria acquired them are quite profitable for UBB. The Bulgarian bank will pay a 7% annual interest in every six months. This is the bank's second issue as UBB launched BGN11.719MN worth ordinary bonds on May 15, 2002.The managers of four other banks- EIBank, TEXIMBANK, HEBROSBANK, and EUROBANK, already have their shareholders' agreement to launch bond issues. In fact, EIBank was the first to launch two-year mortgage bonds to individuals on the Bulgarian market (on March 22, 2002). That is why these bonds' face value was just BGN10. They had a 7.25% annual yield as well as an extraordinary payment scheme. Unlike other banks that paid off their bonds at the end of the period, EIBank redeemed interests and principals in equal parts by paying a total amount of BGN600,000 to its bond holders every six months.It will not be a surprise if another Bulgarian credit institution follows FIB's example and goes out on the international markets. There are favourable conditions for that as Standard Poor's awarded Bulgaria a BBB- investment credit rating on June 21. Investors consider it a sign that improper payments have become less probable now. The investment rating gives Bulgarian banks a chance to attract financing at more favourable conditions - a longer term for redemption of the bonds as well as lower interest rates.

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