Potential of foreign investments into domestic

corporate bonds market

Zoya A. Lebedeva, Ph.D.Head of Financial

Engineering Department,

“EUROFINANSY” Investment Banking,

zoya@eufn.ru

Key market indicators

Stable and rapid enlargement of market scales Boost in volumes of raised funds Significant excess of indicators of placements over those of redemptions

Placements and redemptions of bonds

0

10

20

30

40

50

60

II Q1999

III Q1999

IV Q1999

I Q2000

II Q2000

III Q2000

IV Q2000

I Q2001

II Q2001

III Q2001

IV Q2001

I Q2002

II Q2002

III Q2002

IV Q2002

I Q2003

II Q2003

III Q2003

IV Q2003

I Q2004

II Q2004

III Q2004

IV Q2004

I Q2005

II Q2005

III Q2004

0

500 000

1 000 000

1 500 000

2 000 000

2 500 000

3 000 000

placed, number of issues redeemed, number of issues

placed, thousand USD redeemed, thousand USD

Key market indicators

Dramatic rise in capacity during 2004 – 2005 Outstripping growth of non-financial sector issues

0

2 000 000

4 000 000

6 000 000

8 000 000

10 000 000

12 000 000

14 000 000

01.07.99 01.07.00 01.07.01 01.07.02 01.07.03 01.07.04 01.07.05

Market capacity

Market capacity of non-financial organisations, thousand USDMarket capacity of financial organisations, thousand USD

Key market indicators

Trends similar to changes in capacity Expansion of market instruments range Outstripping growth of non-financial sector issues

0

50

100

150

200

250

300

01.07.99 01.07.00 01.07.01 01.07.02 01.07.03 01.07.04 01.07.05

Number of traded issues

Number of traded issues of non-financial organisationsNumber of traded issues of financial organisations

Term structure of market (volumes of borrowings)

Progressive increase in value of issues with term of 1-3 years and sharp decrease in share in 2005

Significant rise in share of long-term issues as of 9 months of 2005 Low value of short-term issues

0

1 000 000

2 000 000

3 000 000

4 000 000

5 000 000

6 000 000

1999 2000 2001 2002 2003 2004 2005

Term structure of issues, thousand USD

less than 1 y ear f rom 1 y ear to 3 y ears more than 3 y ears

Term structure of market (number of issues)

Stable number of midterm issues in 2002 – 2005 Sharp fall in number and share of short-term issues, played substantial

role during 2000 – 2002 Rise in number and share of long-term issues

0102030405060708090

100

1999 2000 2001 2002 2003 2004 2005

Term structure of issues, number of registered issues

less than 1 y ear f rom 1 y ear to 3 y ears more than 3 y ears

Term structure of market (number of issues)

Stable aggregate volumes of mid-sized issues during 2002 – 2005 Rise in aggregate volumes and share of large issues Low volumes of small issues

0

1 000 000

2 000 000

3 000 000

4 000 000

5 000 000

6 000 000

1999 2000 2001 2002 2003 2004 2005

Structure of issues on volumes, thousand USD

more than1 000 mln.RUR

from 301to 1 000mln. RUR

less than300 mln.RUR

Market structure on volumes of borrowings (number of issues)

Stable number and share of mid-sized issues in 2003 – 2005 Sharp decrease in number and share of small issues played significant

role in 2000 – 2002 Rise in number and share of large issues

0102030405060708090

100

1999 2000 2001 2002 2003 2004 2005

Structure of issues on volumes, number of registered issues

more than1 000 mln.RUR

from 301 to1 000 mln.RUR

less than300 mln.RUR

Industrial structure of market (volumes of borrowings)

Decrease in concentration of resources attracted into leading industry

Enlargement of issuers’ industrial structure Growth of share of non-financial sector in terms of value

0

1 000 000

2 000 000

3 000 000

4 000 000

5 000 000

6 000 000

1999 2000 2001 2002 2003 2004 2005

Industrial structure of market, thousand USD

Mining Machinery construction MetallurgyOil and gas Food industry ConstructionTelecom Transport Pow er engineeringOthers Financial companies

Market structure on volumes of borrowings (number of issues)

Growth in share of companies that don’t refer to telecom, power engineering and mining sectors;

Rise in sector of companies of other industries - additional evidence of industrial structure enlargement

0102030405060708090

100

1999 2000 2001 2002 2003 2004 2005

Industrial structure of market, number of registered issues

Mining Machinery construction MetallurgyOil and gas Food industry ConstructionTelecom Transport Pow er engineeringOthers Financial companies

Innovative market - financial engineering evolution

Changes in products structure: Adjustment of issues’ parameters to

macroeconomic state of market, asymmetry in state governance, changes in structure of issuers

Evolution of issuers’ goals from guaranteed sale of the goods with significant advancing to market funds raising tied up to issuers’ interests

Essential updates in techniques of yield management.

Structure of issues - lack of variety

In fixing up terms: options put provided by issuer or third parties, incl.

accelerating covenants; redemption value amortization.

In fixing up yield rates:

step down rate bonds;

reset bonds;

options on currency and interest rates;

for limitation of payments - floor- and cap- options.

Liquidity of corporate bonds market

Boost in trade volumes Outstripping growth in volumes compared to market

capacity

Market capacity and trade volumes, thousand USD

0,00

5,00

10,00

15,00

20,00

25,00

30,00 Tradevolumes atMICEX StockExchange

Totalturnover,assessment

Marketcapacity

Main provisions of the forecast

  comparability of financial innovations in Russian and foreign markets;

transformation of financial engineering goals due to market evolution;

shift of emphasis from investor’s interests (incl. in damage to interests of issuer) to those of debtor;

  increase in number of instruments, hence derivative-based products of financial engineering

Corporate bonds market dynamics

increase in number of issues and decrease in growth rates of volumes of borrowings

rise in number of issues (at simple structure of borrowings) and growth in share of companies that don’t refer to telecom, power engineering and mining sectors;

dependence of industrial structure of issuers on structural shifts in economy;

application of financial engineering in construction of bond issues as one of the stages in business consolidation and capitalization growth

Terms of borrowings -risk-management

Trends: stable share of midterm bonds and enhancing share of long-term issues (issues of non-financial sector companies)Prospective instruments: amortizing notes; annuity bonds (intended for portfolio investors).

Hedging of risks: trigger bonds (incl. accelerating covenants and poisoned options); credit derivative bonds.

Creation of income – market segmentation

Midterm borrowings – simple structure: discount bonds issue; fixed coupon rate (incl. step down rate bonds), as well as determined by issuer after report registration.

Long-term borrowings (from 5 years) – risk-management and market segmentation: indexation of income and redemption value (related to interest rates and securities market indices); launch of collar-options for limitation of payments; issue of deferred payment bonds or step up coupon notes (issuer’s financial burden management); issue of to credit sensitive bonds.

Main conclusionsRussian corporate bonds market: high yield, relatively risky rapid development due to new issues and enlargement of industries evolution of financial engineering aimed at creation of range of products and implementation of risk-management

Investor opportunities: benefits from operations with junk bonds at emerging market free entrance with further repatriation of funds

Forecast of development: optimistic

Contacts

Zoya A. Lebedeva Ph.D., Head of Financial Engineering Department

OJSC «EUROFINANSY» Investment Banking

Address: 2 building 1, Paveletskaya Square Moscow 115054, Russian Federation

Tel.: (095) 545-3535

Internet: www.eufn.ru