Potential of foreign investments into domestic corporate bonds market Zoya A. Lebedeva, Ph.D. Head of Financial Engineering Department, “EUROFINANSY” Investment Banking,

Key market indicators Stable and rapid enlargement of market scales Boost in volumes of raised funds Significant excess of indicators of placements over those of redemptions

Key market indicators Dramatic rise in capacity during 2004 – 2005 Outstripping growth of non-financial sector issues

Key market indicators Trends similar to changes in capacity Expansion of market instruments range Outstripping growth of non-financial sector issues

Term structure of market (volumes of borrowings) Progressive increase in value of issues with term of 1-3 years and sharp decrease in share in 2005 Significant rise in share of long-term issues as of 9 months of 2005 Low value of short-term issues

Term structure of market (number of issues) Stable number of midterm issues in 2002 – 2005 Sharp fall in number and share of short-term issues, played substantial role during 2000 – 2002 Rise in number and share of long-term issues

Term structure of market (number of issues) Stable aggregate volumes of mid-sized issues during 2002 – 2005 Rise in aggregate volumes and share of large issues Low volumes of small issues

Market structure on volumes of borrowings (number of issues) Stable number and share of mid-sized issues in 2003 – 2005 Sharp decrease in number and share of small issues played significant role in 2000 – 2002 Rise in number and share of large issues

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

Market structure on volumes of borrowings (number of issues) Growth in share of companies that don’t refer to telecom, power engineering and mining sectors; Rise in sector of companies of other industries - additional evidence of industrial structure enlargement

Innovative market - financial engineering evolution Changes in products structure: Adjustment of issues’ parameters to 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.

Structure of issues - lack of variety In fixing up terms: options put provided by issuer or third parties, incl. accelerating covenants; redemption value amortization. In fixing up yield rates: step down rate bonds; reset bonds; options on currency and interest rates; for limitation of payments - floor- and cap- options.

Liquidity of corporate bonds market Boost in trade volumes Outstripping growth in volumes compared to market capacity

Main provisions of the forecast comparability of financial innovations in Russian and foreign markets; transformation of financial engineering goals due to market evolution; shift of emphasis from investor’s interests (incl. in damage to interests of issuer) to those of debtor; increase in number of instruments, hence derivative-based products of financial engineering

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 engineering and mining sectors; dependence of industrial structure of issuers on structural shifts in economy; application of financial engineering in construction of bond issues as one of the stages in business consolidation and capitalization growth

Terms of borrowings - risk-management Trends: stable share of midterm bonds and enhancing share of long-term issues (issues of non-financial sector companies) Prospective instruments: amortizing notes; annuity bonds (intended for portfolio investors). Hedging of risks: trigger bonds (incl. accelerating covenants and poisoned options); credit derivative bonds.

Creation of income – market segmentation Midterm borrowings – simple structure: discount bonds issue; fixed coupon rate (incl. step down rate bonds), as well as determined by issuer after report 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 of collar-options for limitation of payments; issue of deferred payment bonds or step up coupon notes (issuer’s financial burden management); issue of to credit sensitive bonds.

Main conclusions Russian corporate bonds market: high yield, relatively risky rapid development due 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

Contacts Zoya A. Lebedeva Ph.D., Head of Financial Engineering Department OJSC «EUROFINANSY» Investment Banking Address: 2 building 1, Paveletskaya Square Moscow , Russian Federation Tel.: (095) Internet: