Potential of foreign investments into domestic corporate bonds market

1. Potential offoreign investmentsintodomestic corporate bonds market ZoyaA. Lebedeva, Ph.D. Head of Financial Engineering Department, “EUROFINANSY” Investment Banking, zoya@eufn.ru

2. Key market indicators • Stable and rapidenlargement of market scales • Boost involumes of raised funds • Significant excess ofindicators of placements over those of redemptions

3. Key market indicators • Dramaticrise incapacity during 2004 – 2005 • Outstripping growth ofnon-financial sector issues

4. Key market indicators • Trends similar to changes in capacity • Expansion of market instruments range • Outstripping growth ofnon-financial sector issues

5. Term structureof market (volumes of borrowings) • Progressiveincrease in value of issueswith term of 1-3 yearsand sharp decrease in sharein 2005 • Significant risein share of long-term issuesas of 9 months of 2005 • Lowvalueof short-term issues

6. Term structureof market (number of issues) • Stablenumber ofmidterm issuesin 2002 – 2005 • Sharp fall in number and share of short-termissues, playedsubstantial roleduring 2000 – 2002 • Rise in number and share of long-term issues

7. Term structureof market (number of issues) • Stable aggregate volumesof mid-sizedissuesduring 2002 – 2005 • Rise in aggregate volumesand share of largeissues • Low volumes ofsmall issues

8. Market structureon volumes of borrowings (number of issues) • Stable number and share of mid-sized issuesin 2003 – 2005 • Sharp decreasein number and share ofsmall issuesplayedsignificant rolein 2000 – 2002 • Rise in number and share of large issues

9. Industrial structureof market (volumes of borrowings) • Decrease in concentration of resources attracted into leading industry • Enlargement of issuers’ industrial structure • Growth of share of non-financial sectorin terms of value

10. Market structureon volumes of borrowings (number of issues) • Growth in share of companies that don’t refer to telecom, power engineeringandmining sectors; • Rise in sector of companies of other industries - additionalevidence ofindustrial structureenlargement

11. Innovative market - financial engineering evolution Changes in products structure: • Adjustment of issues’ parametersto macroeconomic state of market, asymmetry in state governance, changes in structure of issuers • Evolution of issuers’ goals from guaranteed sale of the goods with significant advancing to market funds raising tied up to issuers’ interests • Essential updates in techniques of yield management.

12. Structure of issues - lack of variety In fixing up terms: • options putprovided by issuer or third parties, incl.accelerating covenants; • redemption value amortization. In fixing up yield rates: • step down rate bonds; • reset bonds; • options oncurrencyand interest rates; • for limitation of payments- floor- andcap- options.

13. Liquidity of corporate bonds market • Boost in trade volumes • Outstripping growth in volumescompared to market capacity

14. Main provisions of the forecast • comparability offinancial innovationsin Russian and foreign markets; • transformation of financial engineering goals due to market evolution; • shift of emphasis frominvestor’s interests (incl.in damage tointerests of issuer)to those of debtor; • increase in number of instruments,hencederivative-based products of financial engineering

15. Corporate bonds market dynamics • increase in number of issues and decrease in growth rates of volumes of borrowings • rise in number of issues (at simple structure of borrowings) and growth in share of companies that don’t refer to telecom, power engineeringandmining sectors; • dependence ofindustrial structure ofissuerson structural shifts in economy; • application of financial engineering in construction of bond issuesasone of the stages in business consolidation and capitalization growth

16. Terms of borrowings -risk-management Trends: stable share of midterm bondsand enhancingshare of long-termissues (issues of non-financial sector companies) Prospective instruments: • amortizing notes; • annuity bonds (intended for portfolio investors). Hedging of risks: • trigger bonds (incl. accelerating covenantsandpoisoned options); • credit derivative bonds.

17. Creation of income – market segmentation Midterm borrowings – simple structure: • discount bonds issue; • fixed coupon rate (incl. step down rate bonds), as well asdetermined by issuer afterreport registration. Long-term borrowings (from 5 years) – risk-management and market segmentation: • indexation of income and redemption value (related to interest rates and securities market indices); • launch ofcollar-optionsforlimitation of payments; • issueof deferred payment bonds orstep up coupon notes (issuer’s financial burden management); • issue of to credit sensitive bonds.

18. Main conclusions Russian corporate bonds market: • high yield, relativelyrisky • rapid developmentdue to new issues and enlargement of industries • evolution of financial engineering aimed at creation of range of products and implementation of risk-management Investor opportunities: • benefits from operations with junk bonds at emerging market • free entrance with further repatriation of funds Forecast of development: • optimistic

19. Contacts Zoya A. LebedevaPh.D., Head of Financial Engineering Department OJSC «EUROFINANSY» Investment Banking Address: 2 building 1, Paveletskaya SquareMoscow 115054, Russian Federation Tel.:(095) 545-3535 Internet: www.eufn.ru