Is it worth investing in Baltic bonds?

For investors looking for a stable and predictable stream of income/interest, bonds provide a more profitable, but also riskier, alternative to bank deposits. At a time when the leading Baltic banks' deposit rates have hovered around 1%, bonds issued by Baltic companies offer an average yield of 8-10%. Companies issue bonds as a supplement to bank financing or sometimes in situations where banks do not want to finance these companies. This supplementary and alternative financing to bank loans has been used for a long time and widely in Western countries, while in the Baltic countries only relatively recently companies have begun to realize how to use such securities to finance the growth of their business. Such Latvian companies as AirBaltic, Elko Grupa, Grenardi, Eco Baltia and a number of others have sold their bonds to investors.

Our observations show that Baltic bonds often offer 1-2% higher yields than similarly risk-rated bond securities in Western Europe and significantly higher returns than bond index funds. On the other hand, investments in the securities of one's region have the advantage of information availability - the issuer's financial and operational performance can be more easily understood, analyzed and monitored. Likewise, the capital market in the Baltics is in a stage of rapid development, and an investor who learns to navigate it in time can have a number of advantages in the future.

Publicly traded bonds are well summarized on the website of the NASDAQ Baltic exchange. However, not all bonds issued by Baltic companies are on this list. For example, AirBaltic bonds are traded on the Frankfurt Stock Exchange. Unfortunately, the liquidity (ability to buy and sell freely on the stock exchange) of corporate bonds in the Baltic States is very low. There are only a couple of companies (for example, IuteCredit) whose bonds are regularly traded on the stock exchange. As a result, when buying bonds, it is better to plan that you can hold them until maturity and not count on the possibility of selling them on the stock exchange. Due to the low liquidity of Baltic bonds, it is better for an investor to buy bonds when the company initially offers them to investors or issues them. Information about such public issues is usually available in the press and on the stock exchange's website.

However, an important nuance is that most companies in the Baltic countries do not choose to issue public bonds, but closed bonds. This means that the purchase of bonds is offered to a limited range of investors. Also, closed issues usually have a relatively high minimum investment threshold of EUR 100,000. Companies choose closed issues because it is cheaper and does not have to fulfill a series of additional requirements set by financial market supervisors. Regular contact with brokers is required to receive offers for closed bond issues. The most active bond brokers in the Baltic States are Signet Bank, Šiauliu Bankas, Luminor, Redgate Capital and LHV.

To purchase Baltic bonds, you only need a securities account, for example, in one of the banks such as Swedbank or Signet Bank. Publicly traded bonds qualify as a financial instrument, so in countries that offer a tax-favoured investment account they can be held inside it. The cost of buying bonds can differ significantly, but it should be calculated that they are at least 2-3 times higher than for buying shares. Unfortunately, buying bonds across borders (a Lithuanian company's bonds through a securities account in another country, say) is not too easy and it is rarely possible to do it in an Internet bank. That's why it's good to arm yourself with the broker's phone number in advance.

A very important factor for investors investing in bonds is to ensure the diversification of these investments. A well-diversified portfolio consists of 20 bonds or more. Such diversification is important to avoid a situation where the failure of an individual issuer can have a significant impact on the overall return of your investment portfolio. If you are aware from the beginning that you will not be able to create a well-diversified portfolio, our recommendation would be to either avoid such investments altogether or invest in bond funds. For example, A3E Capital and Signet Baltic Bond Fund, into which Capitalia merged its own bond fund, run professionally managed funds that invest in Baltic corporate bonds. Also, unfortunately, independent analytical reports and opinions on bond investments are not widely available. Therefore, if you do not have faith in your own financial analysis, it is worth turning to a financier (but not a broker who offers to buy bonds) for help. Other financial institutions, including Capitalia, regularly offer their perspective on bond issues to their circle of investors.

In summary, in our opinion, investing in Baltic corporate bonds is a very promising and attractive way to build your passive income portfolio. Choosing individual bonds can be a relatively cumbersome and time-consuming process, which would be suitable for those investors who can afford to allocate a rather significant amount measured in millions for such investments. For the rest, it is worth looking at what the bond funds offer, for example the Signet Baltic Bond Fund, into which Capitalia merged its own bond fund, while following this industry in the background, because it is facing significant changes and development.