Returning to the topic of investing in debt instruments, I decided to fill the gap and write a separate review on Russian corporate bonds. This is one of the most widely traded instruments of the stock market, popular among private investors all over the world, and Russia in particular. The article will help answer questions about what these papers are, how they arose, and how an investor can understand their diversity.
What are corporate bonds issued for?
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In order not to search chaotically for general information on the instrument, I recommend reading the already published articles about investment in bonds , about federal loan bonds (and here ), calculating coupon income , about Eurobonds , and also how to avoid default on bonds . Since the Eurobonds of Russian companies were discussed in detail in a separate article, today we will focus on ruble bonds. Let’s start with the definition of the tool.
A corporate bond is a security issued by a legal entity in order to attract borrowed funds on the market. The purpose of investment can be replenishment of working capital (short-term bonds are suitable for this), modernization of production, refinancing of previously taken debt, etc. The role of interest payments in this case is performed by payments on the coupon . As a body of debt, upon the expiry of the term of the issue, the holder shall be credited face value. After bank loans, this is the most common form of financing the real sector of the economy. Compared with the loan, plus the fact that additional liquidity can be obtained for a longer period and at a lower percentage . A bond has an advantage over a share in that the issuer retains full control over the company, without changing the ownership structure and diluting the share of existing shareholders. The scheme of the market turnover of corporate bonds in general looks like this:
What are the advantages of this tool for the investor? I will list the main ones in order.
- The reliability of some corporate bonds is slightly lower than bank deposits ;
- The yield, due to coupon payments and a discount, can significantly exceed the return on deposits;
- High degree of liquidity : corporate bonds can be sold on the secondary market or converted into shares;
- Predictability of maturity and the amount of coupon income.
If we continue the comparison with the bank deposit, then the corporate bond wins on the medium and long horizon for more than a year. With the help of bonds, you can fix a guaranteed income for a long time, while deposit rates are constantly changing. To get a good bet, you will have to put a large amount in the bank (in most cases from a million rubles) and for a long time, thereby freezing the funds for a long time. This does not give corporate bonds the qualities of an ideal risk-free instrument, they have their own risks and disadvantages. How to minimize them, choosing quality paper, we will discuss below.
What are the types of corporate bonds?
One of the main advantages of bonds as an investment instrument is their wide variety in the market. Corporate bonds are classified according to several parameters. I will name the main ones.
- By the nature of payments – discount and coupon . The income of the first type is the difference between the actual and nominal price. Usually discount bonds are traded below par, but as the maturity date approaches, the price rises. Coupon corporate bonds provide not only a return on par, but also periodic interest income. Here you can also identify subspecies of papers with a fixed and floating coupon.
- According to the degree of security. Corporate bonds may be collateralized in the form of other securities, movable and immovable property. Such bonds are often called mortgages. For example, banks often mortgage their mortgage loans. The right to claim unsecured bonds is guaranteed by the arrest of property. As a rule, this type of bonds is issued by companies, the stability and solvency of which is not in doubt.
- By maturity and repayment methods . Bonds with a fixed maturity date, when the investor focuses on a specific tenure. Among them are common – when the face value is redeemed at the end of the term and circulation and depreciation, the face value of which is paid in parts (series). Papers for which the issuing company is granted the right to extend, early review, postponement, it is better not to consider, especially for novice investors, for whom the element of predictability is important. Many Russian corporate bonds, in order to increase the attractiveness of the issue, include a put option when the holder has the right to present the paper for redemption at face value for a certain period. In other words, prematurely demand that the company return a debt. The issuer announces a new coupon rate, and the holder decides that it is more profitable for him: to redeem the current issue and “quit the game”, or hold it until the end of the initial term. An example of corporate bonds with an offer can serve as a five-year securities of Tinkoff Bank.
- If possible, exchange bonds for shares, movable and immovable property of a company, goods in circulation, receipts and other assets of the issuer. Here, bonds with an order are allocated, allowing you to buy other bonds of the company or its shares at a fixed price.
- As in the shares, among the bonds can be conditionally distinguished securities of the first, second and third echelons. They differ in the scale of the issuer, liquidity, the value of the trading spread , the degree of risk. The former are characterized by high liquidity, relatively low risk and the minimum spread between the sale and purchase price. Examples of issuers are Gazprom , VTB, Lukoil, MTS, Sberbank, etc. Second-tier companies, as a rule, represent industry or regional leaders, but are inferior in quality to first-tier companies. The third tier consists of companies with ambiguous prospects and dubious credit quality. Among them may be small companies with high growth rates and corresponding risks of default on debt obligations. Spread on them can be a few percent of the nominal, since transactions are rare and turnovers are very small.
How to choose and evaluate corporate bonds
Corporate bonds are traded on the Moscow Stock Exchange in the same section with the shares. Prices, as a rule, start at 1000 rubles, which, in addition to relatively low volatility , is good for the novice investor. You can buy corporate bonds through a broker licensed in the securities market. About the broker selection criteria, see my publications on the blog.
A complete list and all documentation on issues of traded corporate bonds are presented on the Moscow Exchange website. To analyze the paper you are interested in, you can view the issuer’s issuer’s card in the Issuer’s Reporting section (moex.com/s27). Online aggregators can help in searching and analyzing corporate bond issues of interest to you, the most popular of which are rusbonds.ru, ru.cbonds.info, bonds.finam.ru. It is worth paying attention to such analytical resources as the Center for Disclosure of Corporate Information from Interfax (e-disclosure.ru). However, if you wish, you can find dozens of other services in the network that can be convenient for analyzing the yield of corporate bonds, for example, bt.com.ru.
A pleasant event for investors: in March 2017, a law was passed exempting from personal income tax on income from a discount and a coupon when redeeming corporate bonds issued from January 1, 2018 to December 31, 2020. A tax of 35% will be charged only on the percentage of the coupon, which exceeds the current refinancing rate of the Central Bank by 5% (rarely occurs). This measure, according to rough estimates, increases the yield of bonds by 1 – 1.5%, which increases their attractiveness, compared with bank deposits. Pay attention to important details:
- The law does not apply to corporate Eurobonds;
- The issue is not counted from the date of issue, but from the time of registration, which may not fall in the grace period;
- The income from the discount on paper is not taxable only at the time of redemption, this does not apply to sales;
- Bonds remaining in circulation after 2020 also apply.
The disadvantage of corporate bonds is a higher credit risk, when the issuer may terminate coupon payments or fail to return the face value. This is especially true of the papers of the second and third echelons . Higher profitability, as compared with OFZ, is a payment for risk. An example would be Opening Holding corporate bonds, which are now traded for a quarter of their face value.
However, there are a number of advantages:
- A wide variety of issuers, among which you can choose your own options;
- From corporate bonds, you can make a portfolio that, taking into account possible risks, will overtake on the ruble yield government and municipal bonds.
Is it possible to choose suitable corporate bonds by accurately calculating their yield? It will be more difficult to do this, for this you need to know in advance a whole set of conditions:
- Nominal value on the date of the last transaction;
- Fixed maturity date and the number of days to maturity;
- Coupon size;
- Accumulated coupon income at the date of calculation;
- Duration and date of coupon payment.
The calculation will be correct only if you hold the paper until the end of the stated period, and the coupon is fixed or until the end of the term only one coupon payment remains. You can get a higher yield in several cases, for example, in such.
- Buy a bond below par value. To do this, you must have a good reason, because the decline in nominal value is always associated with some market risks. For example, you see active trading at a given price on the website of the exchange, which indicates the calculation of the majority of investors to increase the value in the future. It is worth remembering that with this difference you have to pay taxes. On the contrary, overpayment at par reduces your profitability, although it indicates the quality of the tool.
- The upcoming decline in rates in the economy , so that you become the beneficiary of the difference between the decline in yield on the market and the fixed yield on the bonds in your portfolio.
Issuers issuing corporate bonds, as well as some liquid securities, are assigned ratings. Read more about rating agencies read my article . Here I will just remind you that the rating below BB- on the international scale is associated with the risk of issuer default, and such investments should be approached with caution. It is convenient to check the availability and rating indicator, for example, on the rusbonds.ru service in this section.
Starting to invest, it is worth deciding: does this type of bonds suit you? Compared with OFZ, corporate bonds require immersion in the analysis of the issuer, informed choice from a variety of proposals, as well as certain experience in tracking the market situation. This does not mean that corporate bonds are contraindicated to a newcomer. Bonds of reliable companies of the first and partially second echelons have low risks of default, sufficient liquidity and relative low costs on the spread. To reduce your risks, you need to improve your financial literacy , carefully select a broker and diversify your investment portfolio , including including government bonds.
Readers who have experience in investing in corporate bonds, I suggest to share it in the comments, and novice investors – to ask questions. More in-depth training on the topic is presented in my Lazy Investor course . In particular, lesson number 11 is specifically devoted to investing in all types of Russian bonds.