Updated April 9, 2008

   Corporate bonds’ profitability has demonstrated the significant growth for the three quarters and exceeds 20% per annum by some securities. Having made an investment portfolio from debt securities, it is possible to get profitability almost two times higher, than by bank deposits. However, an investor would require no less than RUR 100 000 ($4160) for this.

   The deficit growth of long-term money supplies is lately observed at the market. Thus, the majority of the Russian and foreign financial institutions have neither desire nor possibility to purchase bonds, and borrowers demonstrate high demand for money. Under all these factors influence the profitability of the 1-tier debt securities has grown by 0,8 percent point (p. p.) on the average, to 8% per annum, as compared to the profitability of autumn previous year. The profitability of 2-tier bonds has grown by 1,7-1,8 p. p., to 9-9,5% per annum. The profitability of the 3-tier bonds totals 14-15% per annum, and sometimes exceeds 20% per annum, while half-year ago it has been approaching 10-11%.

   As the result the majority of bonds issues became a more profitable instrument, than bank deposits. Even big banks (Vozrozhdenie Bank, Petrocommerce, BIN Bbank, AK Bars Bank) offer annual deposit rates from 11% per annum. The rate is usually lower, 7-9%, for up to six month period, but is hardly ever more than 10% per annum. Thus, it is sound to invest into bonds, if the portfolio profitability (depending on the existence term) will be not lower than 12-13% per annum. A 13% tax is paid from the received profit concerning the securities. And an investor can receive 11,3% if the portfolio profitability totals 13%. In terms of the rate overdraft on the bank deposit of discount rate (10,25%) a 35% tax is paid from this overdraft. Therefore, the deposit net profit with the 12% per annum rate would total 11,4%. The portfolio can be constructed from debt securities, which profitability would be almost two times higher than the deposit rate (see Table).

   The experts use two approaches to construct a portfolio. Some consider it is better to purchase securities of the small number of issuers (three-five). "In this case an investor should analyze the small number of companies, and that affects the check quality and reduces control requirements for the own portfolio", marks UniCredit Aton trader. This strategy suits the investors who do not have spare time to control investments daily. While an investor risks losing the significant part of investment in case of one of the issuers default. One should pay attention to the companies that have international agencies ratings, such as Standard & Poor’s, Moody’s, and Fitch.

   If an investor is ready to spend more time for an analysis and control, he can diversify a portfolio, having invested the funds into the bonds of 10-20 issuers in the different industries. The negative affect would be evened at such portfolio structure, even in case of several securities default due to the high profitability of other bonds. "The current market weakness would not probably cause the chain wave of defaults, therefore it is unlikely such portfolio would suffer much", considers Trust Bank analyst Alexey Demkin.

   Trust Bank analysts advise to choose the bonds of issuers, which debt/EBITDA ratio (earnings before interest, taxes, depreciation and amortization) does not exceed 4 to construct the portfolio. When the ratio is higher, it is harder for a company to pay the debts, and the attraction of new borrowed funds is more expensive. And one should pay attention to the duration and quality of the company credit history to estimate the stability of its credit policy. The analysts consider such industries as retail, food, agriculture, construction, engineering and transport the foremost attractive sectors.

   Thus experts agree that the term of securities circulation for a high liquid portfolio should exceed 1 year. "If you purchase securities with the circulation term more than 1 year, you have a price risk in terms of rate change. And the longer term, the higher risk", marks Bank of Moscow analyst Yegor Fedorov. An investor should not also rely on the possibility to quickly sell the securities at the market: a difference between the cost of purchase and sale (spread) can be unacceptable. According to Alexey Demkin, it is better to keep securities till amortization or offer, with the guaranteed buy-off price.

   There is another limitation – investments volume. The expenses would "erode" the substantial part of returns at the small portfolio. "The reason lies in transactions payments, which investors pay a broker", the analyst marks. These are mainly expenses for bonds purchase. Depending on the broking tariff plan the expenses can total 0,1-0,2% from the purchase cost, and RUR 150-300 for a transaction. "In case of the Internet-trade one should pay for the right to use the trade system and for granting the certificate for the key of the electronic digital signature", marks the Capital Investment Group analyst Vladimir Kharchenko. According to the estimations of Capital analysts, RUR 100 000 is the minimum sum to construct a diversified portfolio of bonds.

High profitable corporate bonds

*Coupon rate operating to amortization or offer.

Issues with the nominal volume over RUR 1 billion are indicated.

According to trades results on MICEX as of April 7, 2008.

The data of Cbonds agency is used.