SOCAR bonds: Driver of stock market and best alternative to deposits

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The State Oil Company of Azerbaijan (SOCAR) plans to issue new dollar bonds in the coming weeks. Central Bank of Azerbaijan is already considering the application. Still, the parameters have not yet been made public.

The previous release was in 2016. Five-year securities with an annual yield of 5% and a face value of $ 1,000 per bond are coming to an end.

It is difficult to overestimate the impact of SOCAR bonds on developing the country’s stock market. Since the beginning of the issue, these securities have helped revive the market, attract new investors, and become an excellent alternative to bank deposits.

In 2015, before SOCAR bonds, the turnover of exchange transactions on the Baku Stock Exchange amounted to 8.5 billion manats, which decreased by 35.6% over the year. The largest player in the bond market was the Azerbaijan Mortgage Fund, with a placement volume of 45.4 million manats in the primary market and 1.5 billion manats in the secondary market.

Corporate bonds on the primary market amounted to only 25.6 million manats and 263.7 million manats on the secondary market.

Having entered the market in early 2016 with an issue of $ 100 million, SOCAR, first of all, solved one of the main problems of the stock market of Azerbaijan – simplicity, and accessibility for retail investors.

SOCAR’s bonds helped bring thousands of citizens to the stock market, who have never owned securities till today.

Cəfər İbrahimli

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For the first time in the country’s history, it was possible to purchase bonds in the ASAN Service centers. Hotlines operated, ASAN employees were ready to help with any question, and the media began to cover the event on a large scale. Not surprisingly, some first discovered the opportunity to invest in bonds at that time.

Bonds significantly revived the secondary market – often, the largest deals were made with SOCAR debt securities. The total volume of transactions in these bonds since the issue exceeded 193 million US dollars. In total, over 2,300 transactions were concluded.

Those who were looking for an alternative to bank deposits also showed interest in bonds. The issuance of bonds began in a rather difficult period for the economy. In February and December 2015, devaluations occurred in the country, about ten banks closed during the year, news around the Azerbaijan Deposit Insurance Fund did not subside. Depositors of the closed banks wanted to get their money back as soon as possible. The credibility of the banks has been undermined. The depositors needed an alternative.

Subsequently, investors received another reason to purchase SOCAR bonds – the ability to conduct REPO operations and receive short-term manat loans with a 15% rate. Moreover, bondholders continued to receive quarterly coupon payments from interest on the bonds. The total volume of REPO transactions to date has exceeded USD 36 million.

In an interview with Report, an expert on financial markets, Jafar Ibrahimli noted that SOCAR’s bonds helped bring thousands of citizens to the stock market, who have never owned securities till today.

In this regard, SOCAR has played a significant role in developing capital markets, which helps to ensure the country’s economy’s stability.

According to the expert, before the first issue, the state-owned company carefully studied the domestic market’s needs. “The parameters of the bonds met the needs of the markets, which ensured a high demand for them,” he added.

As Ibrahimli noted, these bonds helped provide liquidity to the secondary market and, most importantly, showed other companies what benefits can be obtained from issuing bonds.

“Before SOCAR, there were small bond issues on the market, but the companies realized that the market could accept larger volumes after this issue. In this regard, SOCAR has become a pioneer.”

For example, the expert cited the state-owned company AzerGold, which recently issued bonds for 20 million US dollars with a yield of 4% and a circulation period of 3 years.

As stated before, the yield of SOCAR bonds is 5%. For comparison, as of January 1, 2016, the average interest rate on foreign currency deposits was 8.06%. Over time, interest rates on deposits in foreign currency only fell (now at 1.71%), and the yield on SOCAR bonds remained at a high level. Besides, SOCAR is a guarantee that investors will receive payments on dividends.

To date, the holders of the state company’s bonds have already received dividends of $ 20 million. And this happens steadily. They receive money once a quarter.

According to J.ibrahimli, now investors can earn about 3-3. 5% on operations with SOCAR debt securities in the secondary market. Speaking about the new issue, he believes that its yield is unlikely to exceed 4%.

“SOCAR, like any company, first of all, looks at the needs of the market. If there are investors ready to buy bonds with a yield of 3-3. 5%, then why increase their spending and issue more profitable securities? Naturally, the State Oil Company wants its bonds to be competitive, but the market situation is already different, and there is no need for such high-interest rates. The profitability of competitors ‘securities is also approximately at this level,” the expert said.

Thus, SOCAR’s bonds had a severe impact on the development of the stock market in Azerbaijan. Retail investors saw good opportunities to make money in the stock market; rather large sums of money, instead of being kept “under the mattress,” went into circulation and began to work for the economy. Now is the turn for the new emission – forward to new heights?

Azad Hasanli, Financial Analyst