WORSENING ECONOMY INCREASES RISK OF DEFAULT
By Elita Babayan
ArmInfo
2009-04-03 12:51:00
An interview with Hayk Papyan, Director General of Cascade
Investments Company, the underwriter of Cascade Credit, ARARATBANK
and ArmRusgasprom bonds
What financial instruments does Cascade Investments offer its clients
and generally the financial market of Armenia today in the conditions
of so big variety of instruments in the international financial
market? What local instruments the foreign investors take interest in?
We can buy or sell any registered securities in any country with
regulated market. Cascade Investments offers its clients both shares
and bonds. It has recently begun offering also certain classical
hedging instruments, in particular, futures contracts, the so-called
tradable securities. For instance, one can purchase several tons
of products to resale them later as easily as he would buy ordinary
shares listed at the stock exchange. This allows local producers and
importers to reduce their financial risks depending on fluctuation
of the prices of these products. For instance, we had clients,
for whom we purchased and resold wheat, rice and gold in foreign
markets. Derivative instruments are very popular now and our clients
have taken an interest in them. We are working to create the market
of commodity and futures contracts for such tradable assets as grain,
sugar, butter, and oil products. This market i n Armenia is still
in embryo, but it may have the key part in the market price making
and risk insurance in future, including in the banking business. We
constantly depend on the global prices. There are many novelties
in the financial markets at present. The list of instruments is
constantly enlarged and such variety confuses investors. The year
2008 proved very unlucky for the shares market. Many traditional
investors suffered inevitable short-term losses. Generally, in
case of necessary instruments and a risk-taking opportunity, it is
possible to gain irrespective of any trends if your market forecasts
are generally realistic.
This is what makes the securities market attractive.
It has become rather effective buying stock indexes and other
appropriately composed securities. The most popular ones are the
so-called Mutual Funds and ETF (Exchange-Traded Funds). Securities in
these funds are classified into groups depending on capitalization,
sectors etc. The principles of index calculation are various. I
think that the key advantage of is of more diversified investment,
less risky and with more sustainable but lower profitability for
long-term outlook. These instruments are first of all convenient
for their size. Spending for instance 100 dollars, you are able to
acquire ‘by a small share’ in several hundreds of companies. Second,
your forecasting becomes rather easier for you. If you are sure that
old people in Europe will spend more=2 0on their health, you can
invest in the group of all the major providers of medical service
in and pharmaceutics Western Europe. You are sure that fresh water
is a rare resource across the world, you can invest in the fund of
producers and distributors of drinking waters etc.
Foreign investors mainly display interest in Armenian shares since
the market is new and we are likely to become witnesses of its growth
within the coming years. Securities listed at the stock exchange are
more attractive, of course, since stock exchange requires regular
reports by a company and an investor does not expect unpleasant
surprises. Cascade Investments offers specific shares to its clients,
particularly, the shares that will grow in price within the nearest
future, as we think. However, buying even not a large package of
shares, one should understand that there is risk to become a long-term
investor against one’s will. Buying such instrument is reasonable when
the investor has the so-called long money. The current situation in
the global market had a negative impact also on the local capital
market. In this connection, foreign investors have some concerns
about investing in Armenian securities. In addition, many of them
have faced liquidity problems.
What is the key characteristic of the Armenian market of corporate
debt obligations? What makes local issuers be so active? Will dram
bonds be attractive to foreign investors in condi tions of further
devaluation expectations?
We have a certain number of accredited issuers. The instrument –
corporate bonds – has become more popular among investors and many
legal entities and individuals obtain it. The major advantage of
bonds comparing to bank deposits is their liquidity. Earlier foreign
investors had bonds in terms of Armenian dram. Now Armenian debt
securities are no longer attractive due to the sharp devaluation of
the Armenian dram. However, bonds in euro and dollars are highly in
demand by local clients. If an investor is sure that euro, dollar, yen
or Kuwait currency will grow, it is indeed quite favorable to invest in
terms of these currencies. Stability of national currency is of great
importance for investors. In addition, one can gain on the securities
with fixed income such as corporate bonds, treasury bonds. Incomes
grow also because of changing the national currency rate. If you are
a dollar investor and you have bought Armenian bonds for instance
with 10% yield, the annual profitability of these bonds and change of
the national currency of this country will ensure your profit. The
second important problem of this instrument is the issue volume. If
it is not large, the efficiency of investing in debt obligations is
low. It is simply absurd for a foreign institutional investor to buy
bonds worth less than $10,000. It is inexpedient. If the total issue
of bonds is not significant, it20is not attractive to major investors.
What makes local issuers passive in IPO?
Securities are issued for various purposes. When developing a project
that will be funded through an issue of securities, a company thinks
the issue of corporate bonds or shares more effective. The greatest
part of our companies is not ready to deal with a big number of
issuers.
Our corporations have no traditions of long-term planning for
some natural reasons. Small domestic market and insignificant
export potential limit the number of prospective projects of
large-scale capital investments. Shares are issued mostly to fund
such initiatives. There is practically no experience of IPO and
few agree to launch it. This procedure implies amendments to the
enterprise structure. If several major emerging companies in our
country successfully launch IPO, many others will follow them. A
similar situation was in the short history of corporate bonds market
development. The companies that purposefully and aggressively chose
the strategy of business development, especially in the conditions of
stiffened competition, can achieve their goals by launching IPO. The
first company to do it, will, undoubtedly, have success.
Should issuers focus on securities? Isn’t it easier to raise funds
from the banking sector?
Everything depends on what the issuer needs money for. Generally, banks
or any other creditors rarely fund long-term, large-scale and risky
proj ects. And it is right. Generally, the long-term, large-scale and
risky project is more profitable. Such projects have always been funded
by a stock capital i.e. through issue or sale of shares. A good company
will always find an investor for the risky but profitable project.
This phenomenon has originated already in the middle age and will
continue in future. So we are not an exception. In the case of
bonds, everything depends on specific issuers and their financial
situation. Issue of corporate bonds is prior to major companies and
banks. First, banks are not always able to issue a big credit. Second,
in case of a bank credit unlike the issue of corporate bonds,
a borrower deals with one creditor, whereas it is risky for an
issuer and creditor to depend on one partner. I admit that for small
and medium-sized enterprises the issue of bonds requires serious
expenses unlike the bank credit. Nevertheless, everything depends
on the status and the financial state of a company etc. There is
no advice or recommendation for all occasions. It is important to
understand the tasks an issuers sets and the level of the risk he is
ready to bear painlessly. This will allow better exploit the current
opportunities in the market.
What is the corporate bonds market outlook in conditions of global
economic crisis?
Alongside with the global crisis, there are many other factors that
may negatively affect the market of corporate bonds .. We have already
considered the negative influence of inflation processes.
If business environment and economy of the country, on the whole, are
worsening, the risk of default is growing. If the global financial
crisis affects business environment, and economy in general, the
profitability of bonds will increase or their price will fall due to
the instable market.
This will, first of all, damage the owners of bonds and will hinder
debt market development. However, I think that the crisis will not
have such significant impact on our economy, for Armenia is not enough
integrated in the global economy. The general situation in the domestic
market is negative. There will be some difficulties. General worsening
of economy may lead to worsening of the activity of isolated companies
and the risk of default of specific issuers may grow as well.