The larger scale importance of the LHV bank bond release

One of the most interesting news in the Estonian investing world last month was the fact that one of the more investor focused banks (LHV) released subordinated bonds. (More here). What made the bonds really stand out from all other financial news is the fact that they were accessible to retail investors such as myself – the minimum was 1 bond, meaning with just 1000€ you could become an investor. There is more significance to this than you might think at first glance.


General access to bonds

When it comes to bonds then Estonia is a somewhat strange country. Unlike most of our nearby neighbours we do not have state bonds. It probably has something to do with our government’s aversion towards having any debt at all, but the result being that investors do not have many long term low risk investing instruments to use. The bond market does exist (there has been about 20 companies that issued bonds in Estonia this year) and the total value of bonds is 60+ million euros, but for most retail investors this is inaccessible since the minimum bid for most bond releases is 50 000€.  This means that if you want to have some reasonable lever of diversification then most retail investors can’t even start looking at bonds until their investment portfolios are at least 500K+. I know some investors pool money with friends to invest into bonds, but it’s still a very inaccessible market. For that reason the fact that the minimum ask for LHV’s bonds was 1K is a truly significant moment.

Social role of bond investments

One of the things we do not really have in Estonia is the idea of purchasing investments as gifts, for example for children in your family. By any metric a steady 10-year bond would be an amazing way of gifting money for any grandparent who cares about the financial future or learning opportunities of their grandchild. Currently if you want to gift money to someone then it’s an awkward process and looking at the liquidity of our stock market then most growth account versions are rather useless (other than LHV’s kasvukonto probably). Overall, I’d say for those people who are keeping large amounts of money in their accounts due to not wanting to risk too much (which is totally reasonable) having access to bonds would be a godsend. I don’t see anyone other than LHV repeating this any time soon, but it’s definitely a good step.

My reasons for investing

Even though my portfolio is reasonably small still, then my current stock account is in LHV and I do value their service. Having the mission of being an investment bank in a country as small as Estonia is impressive to start with, and looking at the levels of competition here then I do believe that LHV will do rather well in the future. For me, since a large part of my investments is in social lending and single stocks then the LHV bond was probably lower risk than most of my portfolio, I wish I had just had more free money during the marking period. Definitely a step in the right direction and I would be very happy to see more lower priced bond releases in Estonia, to make this market accessible to retail investors such as myself who make plans for the long run.

6 thoughts on “The larger scale importance of the LHV bank bond release

  1. I’m normally not into bonds but this one seems reasonable good. Of course there’s always the risk of rising interest rates which would hit the value of the bond but those 6.5% sure beats the savings accounts of today. I got 0% on mine 😮

  2. it may turn out to be not so good of a deal for retails investors.

    as you know, returns from stock market have been superior to bonds, unless bonds were purchased at distressed levels.

    the particular bond market is illiquid. this lack of liquidity may present a problem for retail investor, if one needs to sell its bonds before maturity.

    another inconvenience for the retail investor may realize if the issuer decides to redeem its bond issue before the maturity. this gives the issuer a upper hand.

    it would be nice to know how the insiders acted before and after the bond issuance. was it truly the act of raising additional debt or to swap the debt raised from insiders to retail investors.

    there are other considerations as well such as debt collateral, subordination and the business model. in this case the debt is unsecured (not backed by assets).

    if the business fails, then the bond holder will suffer and the degree of suffering will be determined by the size of business failure. in case of bankruptcy the bonds may easily loose all their value due to the inherent leverage (10% equity to 90% liabilities) and priority of claims.

    1. Overall, I’d argue against the illiquidity argument since you can see people trading them. Of course there are many associated risks with subordinated bonds, but I personally trust that LHV won’t collapse in the near future, however everything is possible.
      Also, since my portfolio is rather risky (a lot of p2p) then I’m completely fine with lower returns for lower risk levels, the whole idea of bonds being to stabilise your portfolio a bit more. Still, first time buying bonds in this form for most retail investors, so hard to predict the end result (acknowledgement of risks one of the reasons why I didn’t buy more bonds.)

      1. do you know why the 50,000 debt note pays 7,25 per cent and 1,000 only 6,5 per cent per annum? and why the maturity date of the former becomes before the latter?

        it is also interesting that the holders of subordinated debt issued in 2012 have the right (expires 20.12.2015) to convert their bonds into equity shares with discount rate up to 10 per cent should the group issue new shares. some of it is already converted in 2014.

        bottom line: according to the interim report the group is preparing for IPO that should take place before summer 2016. it is going to be interesting.

        1. It’s a common thing for bonds that higher valued bonds also have higher returns. It’s common for a 50K investor to earn 10% while a 100K investor earns 12%. Not sure of the historical reasons but this is done for most bond releases in Estonia.

          I agree though, the IPO will be fascinating and I’m pretty sure it will be overmarked, meaning unsustainable stock prices at start.

  3. Indeed, the bond issue was a welcome initiative from the point of view of small investors.

    Unfortunately it still remains an expensive asset class for retail investors to invest their money into as even though bonds (both, this particular LHV bond and bonds in general) seem something that are easy to trade, the reality is that for retail (small) investors, it is very expensive to trade bonds. Banks in Estonia usually take much higher (fixed) commissions for trading bonds than for trading stocks. One should also not look past the considerable bid-ask spreads for the Baltic bonds. Then add to all that custody fees. When taking into account the limited upside/returns that bonds provide, these costs make bonds quite an expensive vehicle to hold one’s cash reserves.

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