Aare Tammemäe: Estonian bond market is like an apartment in Lasnamäe (E24)

The parner of Redgate Capital Aare Tammemäe, has said that Estonian bond market is currently rather calm, but the trend is going upwards. It reminds of an apartment in Lasnamäe – it looks grey, ugly and boring from the inside, but is actually warm and nice from the inside.

According to Tammemäe, bonds are like a tool for the financial officer, and it is important to know what can be done with them. Today, there are three bigger trends in Europe. Firstly, banks’ leverage is decreasing, because they have had increased capital requirements, meaning that banks have to increase their margins to ensure the return on equity. For this reason banks have not been very active in the bond market and prefer to use their own equity.

Secondly, there is a massive movement of investors from state bonds to corporate bonds. High-yield bonds are especially desired. Thirdly, bonds with the floating rate become more popular, because nobody wants to commit themselves with low interest rates for a long time.

Many companies prefer high-yield bonds, because the access to bank financing is complicated. There is also no access to bonds of high-quality. „If there is no rating from the four biggest rating agencies, then all these companies belong to the category of high-risk bonds,“ explained Tammemäe. In addition, many companies have been bought out due to the bond markets, because when banks became conservative, bond investors were ready to provide financing.

Tammemäe says that Estonian bond market is almost non-existent: „We mostly do not trade with bonds, but keep them until redemption and they go from hand-to-hand, not through the stock exchange.“ He said that the first bond which was registered in Estonian Central Register of Securities (Eesti Väärtpaberikeskus) in 1993 was issued by the Republic of Estonia. In the middle of 1990s, the main issuers of bonds was Compensation Fund (Hüvitusfond) and the state.

The second period was when the banks were active in the bond market at the end on 2000s. „The situation was different at the time, because there was not enough money for lending from the deposits, so parent banks asked banks to engage additional money,“ commented Tammemäe. After that came fast-loan offerers, who did not do very well either. Today, the volumes of bonds are again heading upwards on Estonian market, but the interest rates stay also on a high level.

Talking about II pension pillars, Tammemäe said that there are more than 1.7 billion euros in the funds, and according to the statistics 26% of Estonian assets are being invested; however, only 9% are in the securities and everything else remains in deposits.

Regarding the suitability of bonds to the companies, Tammemäe said that the bond is beneficial as a growth capital, because when it is not exactly an alternative for the bank loan, it is still suitable for engaging own equity and financing expansion to the new markets. „A high-quality company in Estonia could issue bonds with the interest rate of 2-4% and the volume of at least 5 million euros; when the emission is also aimed at pension funds, then even 10 million euros,“ concluded Tammemäe.

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