Naftna Industrija Srbije (NIS), the largest oil and gas producer in Serbia, has launched a unique investment opportunity in the Serbian market. The company's shareholders have decided to issue five-year corporate bonds valued at approximately EUR 50 million.
This method of fundraising is not that often pursued by corporations in Serbia, making it particularly attractive to qualified investors who meet the specified terms. A key condition is a minimum investment of EUR 100,000 per investor, with 13 December 2024, set as the deadline for interested parties to purchase the bonds.
Adding to the appeal is an annual fixed net interest rate of 5.5% NET, which is higher than the rates offered by Republic of Serbia state bonds and euro bonds. According to market experts, institutional investors, including banks and alternative investment funds, are expected to seize this opportunity created by NIS.
While the offer's attractiveness suggests a successful investment round, it is important to note that at least 30% of the bond value must be sold for the round to be successful. If this condition is not met, the investment round will be deemed unsuccessful, and investors will be reimbursed.
How are corporate bonds regulated in Serbia?
The issuance of corporate bonds is regulated by the Law on the Capital Market. In accordance with the provisions of the Law, a corporate bond represents a debt security issued by a company (issuer) on a stock / securities market to raise funds for a variety of purposes, such as research and development, debt refinancing, new equipment purchases etc. It gives its holder (the investor) the right to request from the issuer the payment of the money invested (borrowed to the company in a sense) and possible interest.
In order for the bond to be valid, it must contain the prescribed data such as: data on the issuer, total number of issued bonds, nominal value of each bond issued and the amount of main debt, data on interest rates and the manner and terms of their calculation, due date, information on the date for which the payment of principal and interest is tied to etc.
To simplify, a corporate bond is like an I.O.U. (I Owe You) instrument given from the issuer to the investor. It is more financially favorable for the issuer contrary to bank loan or credit, because the interest rates are lower. The issuer determines the conditions of their issuance and so, in a way, is managing its own debt. They are extremely suitable if the issuer does not possess an adequate collateral to get a bank loan.
The working principle of bonds is as follows:
-Investor lends money to the issuer: When one buys a corporate bond, they are basically lending money to the issuer for a set period;
-The issuer pays interest to the investor: In return for the loan, the issuer agrees to pay back interest to the investor, until the bond "matures." The issuer decides on the manner of interest payment (annually, every six months or quarterly).
-Investor gets their money back: When the bond matures (reaches the end of its term), the issuer repays the amount originally invested, known as the principal.
Corporate bonds are considered one of the safest forms of investment, offering stable returns to investors through fixed interest rates. The main risk for investors lies in the overall performance of the issuing company, but the risk is borne to the extent of an investment made, i.e. bonds purchased. However, the volume of corporate bond investments in Serbia remains low, so the practice of their issuance is rather scarce.
The state of the Serbian market
Many corporations are hesitant to issue bonds due to the complex procedures that may take around 10 weeks and involve: planning the issuance, preparing prospects which can be hundreds of pages long, making the public offering and, finally, issuing the bonds. On the other hand, the market demand for corporate bonds is also limited.
However, there are some successful cases of corporate bond issuance in the recent past. On 25 September 2020 the joint stock company Telekom Srbija (MTS) issued its first corporate bonds in the local currency (RSD) on the domestic market, with the total value of approximately EUR 200 mil.
The same company also made a move on a foreign capital market in 2024, by issuing international corporate bonds and amassed a staggering USD 900 million due to many positive reviews and forecasts, leading to a demand that exceeded the supply by more than five times amounting to USD 5,5 billion.
With all being said, there is a significant potential for growth in Serbia’s corporate bond market. It remains to be seen whether this move by Naftna Industrija Srbije and, previously, MTS will attract a more diverse group of investors and serve as a milestone in the development of Serbia’s capital market.
Author: Aleksandar Čermelj, Senior Associate at IVVK in cooperation with Lexquire
For more information about this topic or capital market regulations in Serbia, please contact us at office@lexquire-ivvk.rs.
05/12/2024
