The Egyptian Exchange (EGX) has not seen any trades on corporate bonds during January 2016. The value of government treasury bonds traded totaled EGP 8.373bn, the equivalent of 48.87% of total trading on the capital market of stocks and bonds.
Capital market experts attributed three factors to the weak investor appetite for corporate bonds: the first that companies are reluctant to issue new bonds, unlike before the 25 January Revolution in 2011.
The second factor is that public banks are issuing investment certificates with yield of 12.5%, which is at least 1.5% more than the yield on traded bonds. The third factor is the depreciation of the currency, which negatively affects the real value of bonds when they are due.
Bonds, being the mechanism for financing projects, are vital. It is also an investment tool available to both individuals and companies wishing to invest their money with fixed return at the lowest possible risk based on the credit rating of companies.
Meanwhile securitisation has been favoured among real estate and finance companies. Securitisation is the issuance of corporate bonds guaranteed with the debt owed to companies by customers. These bonds are then resold to investors as a mechanism to obtain financing for projects or activating operations.
Co-founder of Hegazy and Associates (Crowell & Moring) Walid Hegazy said the issue of bonds has weakened in the Egyptian market, compared to before 25 January 2011, when several companies issued bonds.
Among the most prominent companies offering bonds before the revolution are Mobinil, which issued EGP 1.5bn worth of bonds and Ezz Steel, which issued EGP 1.1bn worth of bonds with an average annual yield of 11%.
Hegazy said companies defer from issuing bonds due to the high cost of the process; they would have to raise the yield as a result of the higher risks after the decline of Egypt’s credit rating over the past five years.
The platinum investment certificates issued by state banks for a period of three years and yield of 12.5% per annum constitute competition, which would force companies to offer a higher yield than for certificates, should they issue new bonds.
Hegazy also explained that the depreciation of the pound against the dollar from EGP 7.05 last year to EGP 7.83 now in the official market and EGP 8.60 on the parallel market, pushing investors away from investing in bonds.
“Currency devaluation means lower value of bonds when they require repayment after several years,” he said.
The legislative environment for bonds requires amendments to make trading on government bonds available for individuals directly through brokerage firms, which means attracting investors to the bond market in general and specifically corporate bonds.
CEO of Al-Tawfeek Financial Holding Company Khaled Abou Heif agreed with the stated opinionthat activating the government bonds market will attract more investors. These investors will later consider investing in corporate bonds and compare their benefits to government bonds.
He said this period was supposed to see good demand from investors on corporate bonds as a refuge from losses suffered by stocks over several months.