Azerbaijan: Development of Non-bank Corporate Bond Market
In 2004 and early 2005 there had been a small number of successful bond issues by commercial banks including a bank in which EBRD was a strategic investor. The purpose of the FIRST funded project was to prepare the ground for issuing non-bank corporate bonds and to work with some of the commercial banks’ corporate clients, thereby broadening the capital markets, injecting some investment banking skills into selected commercial banks and developing better corporate disclosures in prospectuses. FIRST initially regarded this as a high risk project and expected initial success to be limited to maybe one or two issues of relatively short maturity in the range $500,000 to $1 million. The expectation was that most of the issues would be subscribed by banks, with the risk that the banks would consider that sponsoring their clients to issue bonds might meet with resistance, since it would substitute for their direct lending to those clients at premium rates.
The project exceeded expectations. Between March 2006 and October 2007 the volume of issues exceeded $21 million and more than 75 bonds were issued. Of these, over $7 million were for non-bank corporate bonds, including an electronics company ($2.5 million), a brick manufacturer ($2 million) and leasing companies (over $2 million). FIRST funded consultants played a major role in the initial issues but more importantly the banks are now sponsoring issues under their own initiative, so the process is now sustainable. As a further development some corporate equity issues are now in preparation.
The groundwork was also laid to justify the development of collective investment products. FIRST responded to a request from the State Securities Commission of Azerbaijan (SCS) to amend the project to include drafting of a Collective Investments Law: this draft has been completed, translated to Azeri, approved by the SCS and is now with the President’s office for approval, prior to submission to Parliament. The SCS is now moving towards membership of IOSCO.
The main output was manifest by identifying issuers, mainly through their banks, and then facilitating the whole process of bringing those issuers to the market. More of an investment banking exercise than a series of specific documentary outputs. Nonetheless, the project succeeded in bringing several non-bank corporate bond issues to the market for the first time.
This project is likely to be unique in FIRST’s portfolio because the background circumstances to the project were themselves rare. The financial sector in Azerbaijan was in many ways at an early stage: the banks were relatively small; the insurance and pensions sectors were undeveloped; in these circumstances the conditions in which to develop capital markets would not have appeared ripe for success. The macro-economic situation was more promising because GDP had been growing strongly on the back of the developments in the oil and gas sector with the completion of the pipeline to the Turkish Mediterranean coast via Georgia. Liquidity was starting to build up in the banking sector and among consumers.
Secondly, the main thrust of FIRST’s support was more analogous to investment banking than a pure capacity building technical assistance because the FIRST consultants needed to help launch some successful bond issues and use this experience as the capacity building tool for the underwriters, stock exchange and regulator. FIRST was fortunate to be able to work with a team of consultants led by Denholm Hall (UK firm) that had substantial prior experience in working in Azerbaijan with the regulator using a combination of European and Russian consultants.
Thirdly, the regulator was taking on the role of market promotion, which in most other countries would be seen as outside the remit of a regulator.
The project was actually introduced to FIRST by the EBRD (local office and London office). This was the first occasion on which FIRST and the EBRD had an opportunity to cooperate. The opportunity was facilitated because several stakeholders were in strong support: the regulator, the EBRD, commercial banks, the stock exchange and several prominent private sector corporate groups. Although this was initially considered a high risk project, the outcomes did demonstrate that with a combination of macro-economic factors and strong stakeholder support it is possible to achieve success.
This project did not involve a great deal of formal training or drafting of documents. Its success was largely reflected in the number of bond issues that took place: in that sense, there is little that can be disseminated.
Where else could a similar type of project be supported by FIRST? There needs to be a market where there is demand for investment product, consequent liquidity, good regulation and market infrastructure but a shortage of investment product supply. Secondly, there needs to be a lack of, or deficiency in, investment banking skills available to bridge the demand-supply gap in investment product for FIRST to be able to justify its “added value” criterion. Such situations may be few and identifying them may require some research effort.