Financial Organizations Forced to Buy SOCAR Bonds, Promising Early Redemption

In the middle of last month, demand for SOCAR bonds in the secondary market increased sharply, and the bonds are bought up by individuals, Report IA said with reference to the investment company PSG Capital.

Official statements about high demand in the primary, and then the secondary market, are the result of artificial measures and a rich imagination, as experts say. According to Turan sources in banking circles, the share of individuals holding bonds of SOCAR is scanty. "Bonds of the State Oil Company were bought by credit and financial, insurance and state organizations. And, they did it forcibly. The fact is that it is not profitable for banks to buy bonds with a yield of 5%, since it is easier to invest in notes and deposits of the Central Bank at a higher rate," the source said. It should be reminded that a little earlier in conversation with journalists, the chief adviser of SOCAR on the securities issue, a member of the Advisory Board of SOCAR Capital LLC Ali Agaoglu denied reports on the social network Facebook about forced sale of bonds. However, sources in banking circles and independent experts continue to insist that sales transactions were not voluntary.

"In the main, state bodies and financial organizations were forcibly caused to purchase SOCAR bonds. Contrary to official statements, the share of individuals is small. The information about the buyers was not disclosed," the bank expert Akram Hasanov told Turan. At the same time, according to the head of the Baku Interbank Currency Exchange (BBVB) Farhad Amirbekov, this information is available only in the Central Depository, which operates under the Financial Markets Supervisory Authority (FIMSA). "For a long time already, the securities have been dematerialized, i.e. they are only treated as account entries. The Central Depository conducts the accounting. I do not know who the holders are," Amirbekov said.

Recall that the total volume of the issue of bonds is $ 100 million, and profitability is 5%. Therefore quarterly payments on the issue of $ 100 million are equal to $ 1.25 million, annual - $ 5 million. For comparison, the weighted average rate at the last deposit auction of the CBA was 12.98%. Though this rate collapsed by 13%, the demand was higher than the application for attraction. So, an application was made for attracting AZN 150 million at the auction, and the demand from the participants made AZN 274.9 million. In its bid, the Central Bank was guided by the rate of 12.01-14.99%.

In addition, at an auction for placement of short-term notes of the Central Bank for the amount of 25 million manat with a circulation period of 28 days, the country's main bank sold 90% of notes. Three investors applied for 21.81 million manat. The cut-off price for competitive bids was determined at 98.8472 manat (with a yield of 14.9945 percent), and the weighted average price was also established by the Central Bank in 98.8788 manat (14.5788 percent). All this testifies to the more favorable offer of the Central Bank, whose deposits and notes have recently been, perhaps, the only source of earnings for the country's banking sector. Investing the existing funds in the bonds of SOCAR, for which the state does not give any guarantees, is not profitable for banks.

Meanwhile, a member of the Advisory Board of SOCAR Capital LLC Agaoglu declares that in the primary market the bonds were sold in a very short time - in just three weeks. "In addition, while the securities were issued in the amount of $ 100 million, the total volume of bids amounted to $ 203 million 604 thousand. That is, the demand exceeded the supply more than twice." However, the subsequent statement about the growing demand in the secondary market is in conflict with the previous one. According to the information, from April 18 to 21 the company received numerous requests for the purchase of bonds mainly from individuals and this process continues. As a result, within 4 days, investment companies sold bonds to individuals alone for 796 thousand dollars.

The question arises, why bonds that have high demand are massively resold. Another, no less important point of this story is whether the holders will be able to return the invested funds.

"Earlier this year, the State Oil Company started actively promoting the secondary market. This is an unprecedented circumstance. The matter is that bonds intended for individuals were not bought by the population in the beginning of autumn, and therefore they were forcibly sold to companies. They were told to buy in the primary market on condition of subsequent repurchase. Simply put, SOCAR promised to rid the holders of these bonds. Hence the growing demand in the secondary market and the role of individuals in its formation is scanty. Most importantly, SOCAR should not buy bonds before the expiration of a 5-year period, as it appears in the prospectus. However, it says orally about their readiness to buy them out," Hasanov explained.

Speaking about the degree of bond security, it should be noted that the state is not responsible for the issuer's obligations, moreover, it has large foreign debts, our interlocutor believes. “I do not insist that the money will be lost, but there is a risk, since SOCAR is an ordinary state company that can be closed at any moment with subsequent delegation of authority. Our state is not responsible for loans to SOCAR. Despite official statements about the activation of the securities market, the true purpose of the bond issue is the debt obligations of the State Oil Company to foreign creditors. In addition, interest rates on foreign loans are much higher than interest payments on bonds,” the expert notes. -0-