Even though Estonian bond market looks very small and grey like the apartment in Lasnamäe from the distance, it is actually not that unnoticeable and unattractive, because it is ending up more and more in the wallets of investors and in the balances of businesses.
More than 95 million euros worth of bonds were issued in Estonia last year, which is quite a small amount compared to the banks’ credit portfolio of 5 billion euros. But the bond market will remain smaller than banks’ financing in terms of values. However, now I am looking at the bond market more positively than a few years ago. There are a few reasons for this. Firstly, during this time there arose a certain group of investors who are interested in the bonds. More and more wealthy private persons have become interested in the bonds as they are good substitutes to the shares and offer certain and stable cash flow with lower risks than stocks.
Secondly, bonds are being purchased more also by the investment funds, and last year even one pensions’ fund participated in the subscription of bonds. This is an especially good sign, because it gives confidence to Estonian businesses that even the pensions’ funds are ready to invest in them. Today, pensions’ funds are the biggest institutional investors in Estonian capital markets. By the end on 2013, the volume of pensions’ funds totaled 1.77 billion Euros and their volume can increase up to 10-12 billion years in the following decades. This impressive number creates a more optimistic outlook on the whole capital market. Out of the whole pensions’ funds’ volume, less than 10% is invested in the local market.
Third reason behind the bonds market becoming more active is that today the bond issuers are mainly medium- and small-sized businesses. First group consists of the companies that offer financial services and for whom the bond market is the initial financing method, because they cannot borrow from the banks. Second group consists of companies that are in the development phase, for whom the current cash flow is not stable enough for the banks. Third group of issuers consists of so-called project-companies – companies that are created for one particular investment, e.g. apartment building developers, who want to engage growth capital.
We are waiting for blue chip bonds
The real bond market will revitalize in Estonia probably only when the big companies will come out with the bonds. I think that it would be proper for the big companies to see the bond market as an alternative investing method. From one side, there are more reasons due to the growing interest of investors, from the other side bonds have the benefits of financial instruments. It might seem for the big companies today that it is easier and cheaper to obtain money through bank loans; however, the company that issues bonds can set its own terms, such as choosing the duration of the bonds, the consistency of interest repayments and other limitations. In addition to flexibility, there is a bigger transparency of the company which leads to a closer relationship with a bigger investors’ community.
Estonian bond market could be led by big state companies similarly to our southern neighbors, as it would give additional indirect benefits to both the state and the owner, especially on the rise of financial knowledge. For example, Latvenergo has issued bonds with the total value of over 100 million euros and 2.8% coupon rate. I do not presume that every person should definitely have a security account, but it is the best to learn about different investment possibilities and their advantages and disadvantages from the real life. But if the capital market is inactive, it can give some negative shades to the whole market in case of some failing instruments.
An Estonian person likes to keep his or her savings on the bank account, thereby the same money is indirectly operating in our economy. Nevertheless, it would good if in the broad picture the state would help the capital markets to offer various opportunities and be as active as possible.
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