AN OVERVIEW OF THE DEPTH OF DEBT MARKETS IN ALBANIA, BELGIUM, BULGARIA, CROATIA AND CANADA

Submitted by:Ishita Kumar, Ankita Agarwal, Chaitanya Murali, Kameshwar Teja and Supragya

SIGNIFICANCE OF DEBT MARKETS

Bond markets are essential for a country to enter a sustained phase of development driven by market-base capital allocation and increased avenues for raising debt capital.

Development of domestic bond markets can increase the resilience of a country's financial system and protect it from external shocks and reduction of available sources of financing in the international capital markets.

Bond markets can be considered an important ingredient in economic growth, financial stability and economic recovery, particularly in the wake of the crisis.

They provide a key capital funding flow to firms allowing them to expand, innovate, offer employment, and provide the goods and services societies demand.

Debt instruments include:◦ Mortgages◦ Bonds:

Government Bonds Corporate Bonds

DEBT MARKET IN CANADA

DEBT MARKET IN CANADA

The Canadian bond market has various types of bonds available, which are issued by both the government and non-governmental bodies. Amongst all the bond markets in Canada, the corporate bond market has been the most thriving. 

The following factors have contributed to its success:

Low InflationLowest Levels of Long Term Interest RatesReduced Public Borrowing

TYPES OF SECURITIES IN DEBT MARKET

Canadian Savings Bonds Savings bonds, provided by the government

Canadian Premium BondsPremium bonds, also supplied by the government

There are some other bonds that are available the market are:

Treasury BillsReal Return BondsMarketable Bonds

FACTORS AFFECTING DEPTH OF DEBT MARKET

The Canadian high-yield debt market has continued to see increasing activity over the past year.

 Recent issuances by oil and gas-related issuers would appear to evidence a greater market of issuers with a higher risk profile that may be able to tap this market.

One of the advantages of the Canadian market is that an issuer can size a deal as small as $75 million and as large as $600 million

 Accordingly, for issuers looking for a relatively smaller amount of high-yield debt, the Canadian market may be more appropriate. The smaller deal size naturally leads to a smaller group of investors, making it more likely for a Canadian issuer to be able to negotiate covenants that may be less traditional and more tailored to their individual needs, as has been evidenced in recent deals.

The Canadian market has also seen issuances with certain features that have been utilized in the United States and elsewhere, such as second lien secured debt and PIK (pay-in-kind) debt to address the demands of the market.

Canadian banks are relatively disciplined and conservative in determining the maximum commitment amount available to their borrowers through the relative "black box" borrowing base concept.

Deepening capital markets suggest that they are being increasingly tapped into to meet the financing needs of an economy. The developed markets of Canada had market depth lower than 50% of their GDP.

DEBT MARKET IN ALBANIA

DEBT MARKET IN ALBANIA

The Albanian Bond Market is dominated by government bonds issued through the banking system. 96% of all bonds issued are government bonds.

Government bonds with a maturity of over 1 year are sold in the primary market through auctions organized by the Bank of Albania.

The Government has issued bonds of respectively 2, 3, 5 and 7 year maturities, with variable and fixed interest rates. After their issuance, such bonds are traded on the retail market by licensed entities.

DOMINANCE OF GOVERNMENT BONDS

The size and dominance of banks in the economy gives them the market power to keep the risk premium on government bonds relatively high.

The result is a risk return profile for government bonds that is preferable to what can be achieved through lending to the private sector.

In essence, banks begin to operate as bond mutual funds that take customer deposits and invest them in government securities. This is profitable since banks can earn a large income without the expense of credit analysis and credit risk management

EUROBONDSFollowing previous unsuccessful attempts,

Albania issued its first-ever Eurobond for a total of EUR 300 million on 28 October 2010.

Eurobonds are Bonds issued or traded in a country using a currency other than the one in which the bond is denominated. This means that the bond uses a certain currency, but operates outside the jurisdiction of the central bank that issues that currency. In Albania, they were issued by the European Bank for Reconstruction and Development

The bond has a maturity of 5 years and carries an interest rate of 7.5%.

CORPORATE BONDSThe corporate bond market remains undeveloped. The

passage of a new law “On Corporate and Local Government Bonds” aims at fostering the development of the market.

Corporate Bonds would help in reducing the relative size of the banking sector within financial system, thus reducing systemic risk, since banks are institutions with extensive use of financial leverage.

Corporate bonds could provide more investing alternatives for general public and other institutions, especially pension funds and insurance companies, by enabling them to design and offer long-term saving and investment schemes & products.

Banks could consider using corporate bonds as a new investment alternative and a different one from bank loan, as well as a good opportunity to yield some fees or offering value-added services for their clients in the securities market.

WORLD FINANCIAL CRISISAlbanian Economy was unscathed through

the financial crisis due to (1) ensuring simple financing structure,

through clients’ deposits and with a moderate use of leverage, and

(2) offering plain vanilla products and services, away from sophisticated and crisis generating products, which resulted as the most crisis-proof, management-effective and suitable model, for the actual phase of Albania’s social and economic development.

(3) Also, this business model was placed into a conservative and stringent regulatory environment, continuously and strictly supervised by Bank of Albania

DEBT MARKET IN BELGIUM

DEBT MARKET IN BELGIUM

Belgian debt market is a small market, mainly domestic.

Belgium issues each year just under 40 billion Euros in bonds.

Belgium, like other European countries has its domestic bond markets in which the government, sub-sovereign entities and companies issue bonds and individual investors participate.

However, bond markets in European countries are increasingly behaving like a single market.

TYPES OF BONDS- BOND MARKET SECTORS

Government bonds [1] Sub-sovereign bonds [2] Corporate bonds [3] Asset-backed- collateralized bonds

[4]

(Each with different characteristics, risk, reward)

[1] GOVERNMENT BONDS/SOVEREIGN BONDS

Issued by the central government of Belgium;

Purpose: To cover the deficit, to refund existing debt, to raise capital;

Highest quality, minimal risk bonds; In Belgium, individual investors

prefer to invest in bonds directly while in other European countries such investments take place primarily through funds.

[2]SUB-SOVEREIGN BONDS

Issued by: regions, provinces, states, municipalities or supranational institutions (supranational entity is formed by two or more central governments to promote economic development for the member countries)such as the World Bank and the European Investment Bank

The market for sub-sovereign bonds in Belgium has less individual participation than in the US.

[3] CORPORATE BONDS2 Categories: investment-grade corporate bonds

(high credit quality) and speculative-grade (lower credit quality)

Individual investors are less involved directly in the corporate bond market in Belgium than in the US.

In order to promote the listing of corporate bonds on the Brussels market, NYSE Euronext set up a ‘bond taskforce’ in 2009. This taskforce was composed of representatives of the major banks, brokers, and law firms, and was strongly supported the FSMA by the Belgian regulator.

[4] COLLATERALIZED BONDS 

Collateralised debt instrument is a kind of promissory note backed by collateral;

Securitisation, Structured Products and Covered Bonds;

One of the fastest developing investment vehicles in the last decade.

The collateralised debt market has been the one most severely hit by turbulence since the summer of 2007, and so is undergoing changes.

TYPES OF PROCEDURES USED TO PLACE BONDS ON THE MARKET 

Tenders [1] Bank syndicates [2] Bonds issued to individuals [3]

[1] TENDERS A tender is a kind of bond sale auction offered by

the State. During these operations, the debt agency announces the amount it wishes to raise and the characteristics of the bonds (coupon, maturity, etc.).

The goal for the debt agency is to obtain the best possible price. The primary dealers and the recognized dealers then offer the bonds to their clients.

A number of carefully selected banks, primary dealers and recognized dealers then participate in the tender and offer their price. The tender is based on these offers.

[2] SYNDICATE LOAN The syndicate loan is a procedure by which

the State issues new bonds through a pool of banks.

The latter are then responsible for offering these bonds to investors on the bond market.

Belgian medium and long term debt bonds are called "OLO" ("Obligations Linéaires"). They are denominated in Euros and are issued by auction or through a bank syndicate, during the first phase of the bond issue. These bonds are generally set at fixed rates and their duration ranges from 2 to 30 years.

[3] BONDS TO INDIVIDUALS

The Debt Agency of the Kingdom of Belgium (l’Agence de la Dette du Royaume de Belgique) is responsible for managing the country's public debt .

The debt agency issues debt securities directly to individuals, 4 times per year.

The bonds available to private individuals are government bonds. They are issued for periods of 3, 5 and 8 years, with a nominal value of 200 Euros. Their coupon is fixed. They are issued four times a year in March, June, September and December by institutions approved by the Ministry of Finance.

DEBT MARKET IN CROATIA

DEBT MARKET IN CROATIA The Croatian debt securities market includes

government bonds, bonds with government guarantee, corporate bonds and municipal bonds as long-term securities and treasury bills of the Ministry of Finance as well as commercial papers of companies as short-term securities. Croatian eurobonds are also traded in the domestic market.

Government bonds dominate Croatian bond market. The bond market is moving slowly towards a more balanced mix of public sector, quasi-government and private sector bonds. The main debt issuers in Croatia are the state itself, the state funds and agencies, and since 2002 for the first time - corporations.

TYPES OF PUBLIC BONDS IN CROATIA

Since the beginning of the transition process in the Republic of Croatia, three types of long-term government bonds have been issued in the domestic capital market: 

1. Bonds issued in the international capital market i.e.2. Bonds issued in the foreign markets (Samurai

bonds, denominated in JPY) and bonds issued in the Euromarket (Eurobonds denominated in EUR, USD, ESP) 

3. Marketable bonds issued on domestic capital marketnon-marketable bonds issued on domestic capital market for the purpose of restructuring the economy (“Big bonds”).

CHARACTERISTICS OF DEBT INSTRUMENTS

All bond issues are denominated in euros, with all the payments made in Croatian kunas, according to current Croatian National Bank exchange rate. The nominal value of one bond is 1 euro, with no exception.

The existing issues’ maturity range is from three to ten years. Issues have been made by public offer, intermediated by banks, all in the domestic market.

TYPES OF INVESTORSThe major investors in bonds in Croatia are institutional investors. This includes open end funds, closed end funds; and since 2002, obligatory pension funds (which are not state-owned). There are 19 open-end funds, created predominantly by banks. There are also six closed-end funds, mostly created during the voucher privatization process. There are also two privatization investment funds and seven pension funds in Croatia. There are also 23 insurance companies.

The insurance industry in Croatia is underdeveloped, and has no significant impact on the financial sector as an institutional investor. Thus, it does not play a major role in the Croatian bond market.

Banks are also important investors in bonds. Furthermore, banks have an underwriting role, acting as an agent in the issuance process.

CHALLENGES FACED BY CROATIAN DEBT MARKET One of the priorities is developing a stable, more

transparent, and deeper debt market with longer maturities. The domestic public debt, all denominated in euros, is highly vulnerable of sharp movements of the exchange rate. Since all the payments are directly linked to the exchange rate, it is crucially important that monetary policy interventions maintain the kuna at a level stable rate.

There are no municipal issues. The counties could securitize their debts, but municipal issues are generally small, without guarantee, and they lack a secondary market. The major part of the public debt is issued by the central state. The potential problem is the lack of transparency, and the fact that city potential is not adequately rated.

It is considered that pension funds will play a crucial role in the development of the Croatian securities market in the forthcoming period. However, pension funds face many restrictions, imposed by the Law on Mandatory and Voluntary Pension Funds. It is expected that these restrictions will be loosened.

DEBT MARKET IN BULGARIA

FINANCIAL MARKET IN BULGARIA

The Ministry of Finance together with the Bulgarian National Bank (BNB) regulates the terms and conditions for bonds issued on the debt market.

Types of bonds available:◦Government Bonds◦Corporate Bonds.

GOVERNMENT BONDS OF BULGARIA

Trading in government bonds is mediated by primary dealers (banks and investment intermediaries) that have the right to acquire government bonds directly at the auctions organized by the BNB. Government bonds are treasury bills, government bonds, eurobonds.

Government bonds are not currently traded at the Bulgarian Stock Exchange-Sofia. Two government bond issues were listed at the Exchange till June 2008 but there was no trading with them.

CORPORATE BONDS IN BULGARIA The size of the corporate bond markets,

relative to the size of the government bonds, is fairly small.

There are no limitations on the issue size. The best effort method is preferred during offerings, rather than firm underwriting.

Corporate bonds can be traded both at the Exchange and OTC in Bulgaria.

The following types of corporate bonds are available at the Bulgarian Stock Exchange-Sofia: debentures; convertible bonds; mortgage bonds; floating and fixed rate bonds; callable and put-able bonds.

GLOBAL RANKINGS IN TERMS OF SIZE OF DEBT MARKETS -

COUNTRY 2004 2007 2013

CANADA RANK 9 – 491.8 RANK 12 -664.5 RANK 13 – 821.8

BELGIUM RANK 17 – 123.7

RANK 17– 148.3

RANK 20 – 263.8

CROATIA RANK 32 – 2.2 RANK 37 – 3.8 RANK 39 – 4.3

GLOBAL RANKINGS IN TERMS OF MARKET DEPTH (% OF GDP)

COUNTRY 2004 2007 2013

CANADA RANK 16 – 48.3%

RANK 21 – 45.6% RANK 23 – 45%

BELGIUM RANK 20 – 34..2%

RANK 24 – 32.2% RANK 22 – 52%

CROATIA RANK 32 – 5.3%

RANK 37 – 6.4%

RANK 36 – 7.3%

CONCLUSION Over the last decade or so, corporate bond markets have become

bigger, more important for the real economy, and increasingly global in nature.

Corporate bond markets have almost tripled in size since 2000, reaching $49 trillion in 2013. Growth stalled in the wake of this financial crisis as banks began deleveraging their balance sheets. However, the amount outstanding from non-financial firms has continued to expand.

Market depth (amount outstanding as a percentage of GDP) has been increasing amongst developed and emerging markets, averaging 169% for developed markets and 24% for emerging markets in 2013. Deepening markets can suggest increasing reliance on corporate bond markets to meet the financing needs of an economy.

Since the onset of the crisis in particular, corporate bond markets have begun to fill an emerging gap in bank lending and long-term financing and are showing potential for servicing SME financing needs.

It been increasing strongly in terms of issuance. A search for yield is driving investment in corporate bond markets. Secondary markets are also transforming to adapt to a new economic

and regulatory environment. Understanding the nature and reasons for this transformation is key in identifying future potential systemic risk issues and opportunities for market development.

QUESTIONS?