The last four bond issues of Latvian companies – Storent, Grenardi, Citadele and Mapon – have been very successful. Investors have been willing to buy these securities for much more than these companies could offer. This contrasts sharply with the relatively cool mood in the Baltic stock market, where the price level is basically stagnant or falling. Accordingly, investors’ money appears to be flowing from equity investments to bonds, which offer regular and predictable returns.
The attractiveness of Baltic corporate bonds can be understood, as they offer significantly (on average 2-3%) higher yields compared to high-risk bonds in Europe. Here, on the other hand, I would like to immediately remind you of another key word – almost all bond issues of Baltic companies on a global scale fall into the “high risk” category. This means that there is a sufficiently significant probability of not only not receiving the expected interest, but of losing part or all of your investment in such securities. For example, PlusPlus Capital (Estonia), Uvic Eesti (Estonia), IntegreTrans (Lithuania) and Timo Houses (Estonia) have had difficulties with bond repayments or bond compliance in recent years. On the other hand, in 2009, under the influence of the financial crisis, more than a third of the Baltic companies that had issued bonds at that time had problems with repayment.
What happens in situations where bonds are not repaid (default)? In most cases, every investor is on his own. The brokers who have traded the bonds wash their hands in understandable innocence (they only trade them, not manage them) and in the background scratch the names of these failed companies out of corporate presentations and websites. Sometimes lawyers (for a fair fee) offer to combine investors’ interests and jointly litigate for loan recovery and collateral realization. Either way, bond default is a painful process for all investors involved.
Besides the risk of insolvency, there is another circumstance that every investor must take into account – bonds are a relatively complex investment product. The investor must be able to read and understand all the terms set forth in the prospectus. Also, the investor must be able to evaluate financial data and determine credit risks. External and independent credit rating reports are only offered for very rare Baltic bond issues (such as Airbaltic Corporation bonds). Unfortunately, it is often enough for investors that the bonds are offered by a publicly known company. What can happen to subordinated (what does that mean?) Citadele bonds – it is a big bank (does anyone still remember Parex bank?).
My belief that Baltic corporate bonds are a good investment remains. It really is. However, my advice and reminder is that you need to invest with consideration and understanding. First of all, it means diversification. The minimum number of bonds to ensure good diversification is 10, and the preferred number is 20 and more. Second, it is important to be able to understand and put the bond offering in context with other securities and investment opportunities available in the market. It is difficult for a broker selling a bond to be an unbiased advisor, so you should be able to do the analysis yourself or with the help of your independent advisor.
A fund is a simple solution for diversified and high-quality bond investments. Also, for example, Capitalia manages a Baltic corporate bond fund, which has a historical net yield of 9% since its inception. By investing in the fund, the investor automatically gets a diversified bond portfolio, as well as the confidence that each security has been carefully selected and monitored. Moreover, the most attractive bond offers are not those that are available and announced publicly, but private issues and transactions in the secondary market, where it may be difficult or even impossible for a private investor to access. Investments in bond funds start from amounts of EUR 20,000.
In summary, the Latvian bond market is really hot, but that is why it is even more important for investors to be able to keep a cool and rational mind in order to ensure the best return in the long term.
