Subordinated bonds as an opportunity for additional income at a time of inflation
May 16, 2022
With record high inflation continuing, both individuals and entrepreneurs are concerned about where to invest so that money does not lose value. The Head of the Investment Clients Department at BluOr Bank, Andrejs Kočetkovs, talks about why this is not the best time to invest in gold or real estate and what alternative investment opportunities are available in the Latvian market.
Will the prices stop rising?
Financial experts agree that the shockingly rapid rise in annual inflation in Latvia will continue in the coming months, and a slowdown in consumer price growth can be expected no earlier than the second half of the year. This is evidenced by the dynamics of raw material prices in world markets, disruptions in supply chains, unstable geopolitical situation and consumer expectations for price changes.
Also, global forecasts of a possible economic downturn and a rise in inflation today cause great caution regarding traditional investment opportunities. The World Bank has recently reduced global economic growth from 4.1% to 3.2%. According to forecasts of the International Monetary Fund, average inflation in the euro area this year will reach 5.3%, whereas for Latvia it is projected to be as high as 10% with economic growth of 1%.
This means that if nothing is done, then within a year all monetary savings will lose 10% or even more of the value. In order not to lose money, you need to invest, but traditional investment tools do not promise great profit opportunities.
Why is gold and real estate not the best choice?
Gold has always been one of the most renowned lifebuoys in history to preserve the value of money in times of financial crises. However, gold prices are relatively high at the moment, and the best time to buy it in order to make profit is in the past.
Also, the return on investment in real estate should be approached with caution, since its management and maintenance are not cheap. The expected yield is 2-8%, and the more expensive the property, the less profit.
In recent months, one of the best known tools for earnings – stock markets have also experienced extreme volatility, fluctuations and a general downward trend due to the war unleashed by Russia in Ukraine. If you want to invest in stocks, I would recommend consulting with knowledgeable and experienced professionals in this field.
A safer but less profitable option is to invest in fixed-yield instruments – bonds; however, this type of investment has also experienced a major decline in recent years, not allowing it to overtake inflation.
What are the advantages of investing in subordinated bonds currently offered by BluOr Bank?
Subordinated bonds are one of the least used investment instruments in the Latvian market, allowing to get a yield of up to 5-7% for a 7-10 year term. They are used not only by banks, investment funds, insurance companies, but also by experienced private investors with an already established investment portfolio.
BluOr Bank is among the few Latvian banks that offer subordinated bonds to their clients and interested parties – from May 16 to 27, 2022, BluOr Bank issues subordinated bonds in a public offer to investors in Latvia, Lithuania and Estonia worth EUR 7 million for a seven-year term, with maturity date 1 June 2029. Bonds will be listed on NASDAQ Riga Baltic Bond List.
The annual interest rate is 7%, interest is paid every three months. By investing funds, buyers of subordinated bonds can count on a high fixed yield, which will exceed the expected inflation in the next few years, which is projected at 3-4%. If we talk about risks and compare types of investments, it should be noted that a deposit is an investment with a lower risk, but investing in subordinated bonds brings significantly higher income.
Why is it safe to invest in bank subordinated bonds?
Banks in Europe, including Latvia, are one of the most strictly supervised businesses, which must comply with the stringent requirements of the ECB, the national central bank and financial supervisors. European regulation has become more stringent with regard to capital adequacy calculation and requirements, AML, liquidity etc. Additional reliability is also provided by the fact that subordinated bonds are issued on the Nasdaq Baltic Exchange – in order to take this step and ensure a public issue of bonds, the bank must meet a lot of requirements that only stable financial institutions can do. When buying subordinated bonds, the client gets freedom – the money is handled by the issuer, who regularly provides detailed reports on cash returns, and the process of issuing bonds is as clear and transparent as possible.
What is BluOr Bank today and where does it rank in Latvia?
BluOr Bank was founded more than 20 years ago. It is a 100% Latvian capital bank whose shareholders are its founders – four Latvian entrepreneurs. Specializing in international trade, logistics and maritime transportation, they were able to create a bank that effectively solves significant issues for entrepreneurs and helps business growth. Today the Bank provides services in all European countries.
BluOr Bank is the sixth largest bank in Latvia and is included among the five systemically important banks in Latvia. The Bank’s mission is based on long-term partnership and provision of financial services to corporate clients, contributing to business development and growth of their companies. Currently, clients from the Baltic States and European countries account for 98% of the total client share. Owing to the Bank’s purposeful efforts to improve financial services for legal entities, the number of clients – legal entities in 2021 alone increased by 33% compared to the previous year.
The Bank purposefully introduces the latest technologies with an emphasis on providing online services. Since 2021, the Bank has been providing remote opening of corporate accounts for both Latvian entrepreneurs and companies registered in the countries of the European Economic Area, as well as in Switzerland and the UK. BluOr Bank is the first bank in Latvia to provide entrepreneurs with improved identification options for opening a current account and on such a wide geographical scale.
What is the Bank’s goal in offering investors to purchase bonds?
The proceeds from the issue of subordinated bonds will be used to strengthen BluOr Bank’s capital, which, in turn, will allow more successful development of the Bank’s services – promote lending, attract deposits and strengthen positions in the market, contributing to the growth of the national economy and business development of local companies. More detailed information about the BluOr Bank’s subordinated bonds offer can be found on the Bank’s website in the section “For investors”.
What would you advise those who are thinking about investing?
Today, the world and all of us need peace more than anything – for the war in Ukraine to end as soon as possible, to reduce concerns about the future, which will also bring economic stabilization and gradual growth. My advice to those who have free funds or savings is to think five steps ahead, always evaluate the risks, but at the same time be enterprising and choose the most suitable way to ensure a more secure future. In case of doubt, lack of knowledge or information, you can always consult with experienced, knowledgeable investment experts.
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