Ernst&Young in its opinion the accounts in accordance with IFRS for the year 2015 holding company of the group “Otkrytie” (“Discovery holding”) in the section “Important circumstances” noted significant concentration of investments in Eurobonds of the Russian government with maturities until 2030, as well as the debt of a Russian company in reverse repo”.
Group OTKRITIE holding indicated in the financial statements as at 31 December 2015 of the group’s investment in Eurobonds of the Russian government with maturities in 2030 (better known in the market as “Russia-30”) was 831,96 bn Is 20% of all of the group’s assets, which at year-end reached 3.9 trillion rubles. These securities were mainly bought in 2015: December 31 2014 at this tool had just invested 13.1 billion rubles.
In reporting says that the group holds 74% of the issue of these securities (31 December 2014 the group had only 2% of the issue). “To Finance investments the group has attracted foreign currency loans for a period of up to one year for repurchase agreements with the Bank of Russia, as well as other short-term funds”, — stated in statements of the holding company.
“The Bank began to buy up the “30” at the end of 2014, most of it bought with funds raised in the Central Bank’s foreign currency repo transactions,” says a source close to the Bank. This information is confirmed by another source close to the Bank. “The coupon on the bonds is 7.5% and the rate of attraction of currency the Central Bank then was Libor +1,5%, that is, the Bank received currency in the Central Bank under less than 2%, bought bonds at her with an income of 7.5% and thus profit on the difference in interest rates, describes a scheme close to the Bank source.
Moody’s analyst Petr Paklin assumes that the auditor has insisted that “Discovery, revealed the details of these transactions, as the volume of transactions for the purchase of securities with borrowed money is unprecedented.
In the reporting it is said that major investments create liquidity risk and may adversely affect the group’s financial condition if conditions change or Finance these securities have to sell.
Paklin believes that the change in funding conditions means the risk of changes in interest rates on foreign currency loans and the risk that the repo transaction will not be extended, the Central Bank partially or fully. “Even with the rate hike by the Bank of Russia, the margin for this transaction remains quite high: coupon with fixed interest rate of 7.5%, while the cost of weekly and monthly currency repo auctions, the Central Bank does not exceed 2.5%. There is a risk of increased funding costs, but only in the case that the fed will sharply increase interest rates. Also, the Central Bank may revoke the currency repo, then “Opening” may take in rubles and make currency swap,” adds Paklin.
According to analyst S&P Rybalkina Novel, the main risk is not in the difference in interest rates, and that group runs the risk to sell the bonds at a price below carrying value. “When you hold almost 80% of the issue, it is difficult to simultaneously sell it in the market without changing bond prices,” says Rybalkin. Paklin agrees with him: “a High risk in this situation is that, if necessary, papers will be sold at a substantial discount to the market price”.
“We do not comment on the structure of our portfolio, including issues associated with specific tools,” responded the press service of “OTKRITIE holding. They also noted that in comparison with other commercially available instruments investments in government Eurobonds of Russia are the most optimal yield with high quality. “The market has a stable demand for transactions REPO with the given instruments, also banks group “Discovery” has the opportunity to attract cash transactions direct REPO with the Bank of Russia,” added the press service.
The group also used funds of the Bank of Russia for lending to Russian companies and Russian Bank under reverse repurchase agreements. The carrying value of these loans at reporting date amounted to 484 billion. the Group calls for the accountability of borrowers, but a source close to the Bank, says it is “Rosneft” and its affiliated all-Russia regional development Bank.