What does a bond offer mean?
An offer on a bond is the investor’s right to sell the company’s paper ahead of schedule at a pre-agreed price. Such transactions are usually concluded with corporate instruments.
For example, the issue took place on April 15, 2020. The repayment date is 04/15/2030. Coupon payments are made once a year. Early redemption can be scheduled 5 years after the issue. That is, in 2025.
At redemption, the link is made to its nominal value. However, sometimes only a portion of the face value may be provided.
The terms of redemption are agreed upon in advance. This usually happens along with the payment of the next coupon. On Russian bonds, payments are made on average every 3 years. The same period is provided for the offer. The terms of the repurchase are specified in the decision on the issue. This model of financial relationships allows the investor to get rid of unprofitable instruments.
For such bonds the coupon is variable. In other words, its size is fixed until the redemption date. Then the issuer adjusts the rate based on the market yield of similar bond issues.
It is appropriate to make profitability calculations based on the next early repayment date. It is the same as in terms of yield to repurchase.
“Call Coverings” Methodology
Many experienced traders make regular profits from options in this category by making investments without waiting for a significant increase in the price of the asset. That is, as soon as the subject of the contract has risen in price above the premium, and the asset continues to grow, the investor sells the option to third parties.
In all cases, traders should be careful in making forecasts, on which the success of such exchange operations directly depends. These tools only work well with strong professional intuition, complemented by complex monitoring and forecasting abilities.
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Features of bonds with an offer
A distinctive feature of bonds with an offer is a variable coupon. The rate is determined before the offer date. After which the company sets a new value. The indicator is adjusted once every 2-5 years. However, the investor cannot know exactly how much the rate will decrease next time. Therefore, calculating profitability for 5-10 years in advance is unrealistic. The maximum until the future maturity date.
It should also be recalled that the repeated circulation of securities on the market is carried out from the day the company registers the report on the results of the previous issue with the Bank of Russia (Regulation of the Central Bank of the Russian Federation dated December 19, 2019 No. 706-P).
Transactions based on an offer are subject to this rule. Therefore, a situation may arise in which the holder will not be able to present the security for redemption in the near future. Since the bond issue is still in the process of placement.
This happens when purchasing activity is low. The holder will have to wait for a future offer or final redemption.
Types of offers for bonds
There are two types of offers available to investors:
- Put offers.
- Call offers.
The difference between them lies in who exactly initiates the early redemption. Most Russian bonds are irrevocable. Call offers are found mainly among Eurobonds. Securities are issued in dollars and euros.
Put offers are very popular among corporate bonds. Such transactions are not concluded for OFZ and municipal securities. A damping mechanism is used here.
Put offer
When the appointed date arrives, the owner can present the securities for redemption. And also leave the bonds until the next redemption. The company must buy them out. This type of agreement is called irrevocable.
A put option allows you to free up money for further reinvestment in more profitable instruments. Early redemption of securities protects capital from possible risks associated with their long-term ownership.
Example. The paper of PJSC Detsky Mir is traded on the market. Series – BO-04. The coupon is variable. Rate – 9.5%. Payments are made twice a year. The last payment was made on October 4, 2019. The next payments are scheduled for 04/03/2020. There are 1.5 months left before them. The holder has the right to present instruments for redemption if he is not satisfied with the coupon rate.
This type of agreement benefits both parties to the transaction. A company's credit rating can change at any time. The ability to repay an asset at par allows the owner to reduce risks and the issuer to avoid frequent re-issues of bonds.
Holders have the right to demand early redemption before the maturity date, regardless of the presence of such a clause in the decision on the issue. The basis for presenting claims is a significant violation of the terms of the contract (Article 17.1 of the Federal Law of April 22, 1996 No. 39-FZ).
Call offer
When the appointed date arrives, the company has the right to buy back the securities on its own initiative. The issue is repaid in full (partially). Therefore, the holder is obliged to deliver the instruments for redemption. Such agreements are considered returnable (revocable).
The call option helps reduce the debt burden. It also allows the company to reduce borrowing costs. For example, if the discount rate has decreased and market conditions have improved. This implies further debt refinancing.
However, a rate cut may encourage investors to redirect capital. Therefore, callable securities usually have a yield premium.
Irrevocable (Put)
This type of option is more suitable for investors. Its second name is an irrevocable offer. On the date of its execution, the investor has the right to present securities for redemption. He can also leave them until the next offer. The issuer, in turn, undertakes to repurchase the investor's bonds.
The put option is the most attractive for investors on the Russian market. It makes it possible to use available funds for early repayment in order to reinvest them with higher returns. It also allows you to protect yourself from risks that may arise when holding debt securities for a long time.
Bond offer mechanism
Nobody knows the size of the rate at the time of redemption of the bond. The issuer determines it based on its own financial plans. However, you can find out the bet formation algorithm.
Understanding how the offer mechanism works can fundamentally change an investor's effectiveness. It is enough to study only three documents that regulate the issue and circulation of securities. This includes the “Decision to issue...”, “Prospectus...” and the offer. All three documents are posted on the company website. The necessary information is also available on specialized resources - disclosure.ru, e-disclosure.ru. Let's look at the example of the release of RUSAL Bratsk-7-ob.
The issue decision (clause 9.3) displays information about the procedure for determining income, including profit on coupons. The duration of coupon periods and the procedure for forming the rate are also indicated:
The principle for determining the interest rate is stated below:
The screenshot shows how the first period rate is determined. For all further payments, the company independently determines the rate. What is described in detail in paragraph 9.3.2:
The screenshot shows that if the company has not set the rate for the entire validity period of the issue, then it is obliged to determine the amount of coupon payments 5 days before the start of the next coupon period. The decision specifies the duration of the new rate. If there are uncertain periods remaining on the instrument, then an early redemption date is automatically set.
The investor can find out about the coupon rate and the number of coupon payments five days before the event occurs. Similar information is displayed in the company card.
The presence of such information will allow the investor to calculate in advance the profitability for the entire time before the next repayment. Based on the calculation results, it is possible to estimate the change in the indicator in relation to the average market return. If there are more profitable offers on the market, the holder can present the assets for redemption. And the proceeds will be redirected to another place.
Types of contracts
Options are made according to buyers' intentions and actions. For a Call option, the concept of “asset in funds” is sometimes used. This means that the price of the asset being sold is currently higher than the exercise price. Accordingly, when they say “out-of-the-money asset,” they mean a price that is below the execution price.
Types of options depending on the underlying assets:
- stock;
- commodity. An agreement is concluded for raw materials or a specific product sold on an exchange;
- on futures. They are concluded on the basis of futures contracts with existing underlying assets;
- currency. Contracts for changing the exchange rate of foreign currency in relation to the national one;
- on the interest rate. The base is government bonds with different maturities;
- to index. We are talking about concluding agreements for groups of shares of different companies. They are characterized by low volatility and reliability.
If this is an option on a specific product, the asset can be any product. Fulfillment of the contract means that the seller must deliver the goods or currency to the buyer. The underlying asset of a commodity option is the commodity. This could be fuel, cars, etc.
For example, if an oil and gas company has set itself the goal of minimizing risks from a decline in oil prices (which may lead to financial losses), it can purchase a Put option. Thus, it will secure the right to sell oil at the price established at the time the agreement was concluded. If the price continues to fall, the company will benefit. But if the forecasts do not come true, that is, the price increases, the right to sell may not be used.
In this case, actual delivery (unlike contracts for cash goods) is not carried out. If the price of oil falls below that specified in the contract, the seller agrees to pay the buyer the difference between the market and contract value, multiplied by the amount of fuel.
Futures, foreign exchange and index contracts have many similarities to commodity options. Regarding rate contracts, they help to fix the permissible amount of interest on loans with a set rate or will allow you to designate a minimum limit on deposits. The amount paid as a premium to the seller includes the risk of changes in interest rates.
A futures contract is roughly the same as other types of derivatives. The purchased asset must be in the hands of the buyer before the option expires. In some cases, the futures and option exercise dates coincide. This means that the holder of the contract will purchase shares or a specific product at the time of its expiration.
- How to start trading on the stock exchange;
Where to view bond offers
The early repayment date is usually known in advance. It is indicated in the prospectus. Separate information is displayed on the bond page on the Moscow Exchange. The investor can also find out the necessary information on the website rusbonds.ru. All the necessary information is in the “Buyout” section. Access to financial data is provided after registration in the system.
Current data on financial instruments can also be found on the Moscow Exchange website. All you have to do is use the form to search for the required asset. You can narrow your search parameters using special filters. For example, by checking the box opposite “OFZ or corporate…”. A list of offers will appear at the bottom of the page. All you have to do is choose the right tool.
The announcement of the upcoming corporate action can be seen shortly before the offer date on the portal of the National Settlement Depository.
To find the news you need, just use the search bar. Here you need to indicate “Name of the issuer or code of the bond issue.” For example, release code "XS2101101942". The system will give the desired result. The search page displays all the necessary information.
Some publications may not be publicly viewable. Such information is available only to qualified investors.
The cautionary tale of the first known call option
The famous ancient Greek mathematician and philosopher Thales noticed that the local olive groves had not produced a good harvest for several years. Then the sage offered the plantation owners a small payment for equipment for pressing olives that was practically unused during lean times. The owners happily accepted the offer. And as soon as the olive trees began to bear fruit abundantly, the right to use the winepress was resold at exorbitant prices to the same sellers. This is how the first call option based on a correct forecast appeared.
In a more modern form, this instrument was introduced in London in 1810. And by the end of 1990, such active options were traded on all exchange platforms in the world. Russia joined trading in these assets in 2011, the year the Moscow Exchange was founded.
How to present bonds for redemption
The holder must notify the company or its agent of his decision to present the securities for redemption. Notification is sent at least three days before the deadline for accepting applications.
Clients of FG "BCS" can send a notice through the company's traders, by phone or by sending SMS in the Quik trading terminal. The cost of the service must be determined separately. If the investor notified the company independently, then on the day of the redemption he needs to submit a targeted application. This can be done by phone. If the notification was transmitted through BCS traders, the application is submitted by company employees. Nothing more is required from the investor.
Each repayment has its own characteristics. This includes the method of submitting instructions or other technical nuances. Therefore, it is advisable to make inquiries in advance.
Bonds are written off the next day after early repayment. The money is credited to the investor's account.
If the company announced a rate cut, and the holder did not submit an application to sell the bonds, then it is considered that he accepted the new conditions for the coupon profit.
