Investment company Cube Invest has entered the market with its own bonds, offering investors a debt instrument that is new for the company. The total issue volume amounts to 5 billion drams, the face value of one bond is 100,000 drams, and the maturity period is 36 months. In an interview with NEWS.am Tech, Cube Invest CEO Mikael Margaryan explained why Cube Invest decided to enter the bond market itself and what yield the bonds offer. 

Bonds worth 5 billion drams were sold in one day 

According to him, the decision to issue its own bonds had not been made overnight at Cube Invest. The company has long been actively operating in the capital market and has participated in the placement of bonds for other companies, but now it decided to take on a new role for itself — not as an organizer and intermediary, but directly as the issuer.

“As an active participant in the financial and capital markets, we have always been at the center of processes related to bond issues. We helped various companies carry out their own bond issues. But now we decided to become part of the capital market ourselves and act not as the placing organization, but as the issuer,” Margaryan said.

According to the company’s CEO, the issue itself became a kind of test of the level of trust from the market. Margaryan also considers the speed of placement indicative: according to him, the bonds were sold in just one day. “The fact that Cube Invest bonds worth 5 billion drams were sold within one day is also one of the proofs for us of this trust and that we are moving in the right direction,” the CEO said.

At the same time, as Margaryan noted, demand for the securities came not only from professional market participants. Among the buyers were both institutional investors and financial organizations, as well as retail investors, which is also an indicator of trust. 

The rate on Cube Invest bonds may change

Cube Invest bonds differ from many other securities on the market in that they provide for a floating interest rate. For the investor, this means that the coupon yield is not fixed once and for all, but depends on changes in a certain indicator. 

The yield on Cube Invest bonds for the first six months has been set at 10.5% per annum. However, the key feature of the issue is that the rate is floating. Starting from the next period, the yield will be calculated based on the refinancing rate of the Central Bank of Armenia plus 4 percentage points.

The Central Bank makes decisions on the refinancing rate according to a pre-established schedule. At the same time, the regulator takes into account the economic situation, the level of economic activity and, in particular, consumer price dynamics. Changes in the refinancing rate also affect interest rates in the financial market. According to Margaryan, such a mechanism is important not only from the point of view of the financial instrument itself, but also from the point of view of investors’ understanding of how the market works.

“Today we have a problem: people need to be educated and financial instruments and terms need to be explained to them. For example, people often think: if one bond gives 12% and another gives 13.5%, then the one with the higher percentage is automatically better. But it is important to understand under what conditions the rate may change and why the Central Bank decides to raise or lower it,” he noted.

That is why Cube Invest also views the issue as an opportunity to increase the interest of a broad audience in financial instruments and the mechanisms that determine the cost of money in the market. 

“Our main goal was to emphasize the importance of various financial market instruments and draw the attention of the general public to them. We are also trying to bring a certain educational component to the market,” Margaryan said.

Who benefits from a floating rate?

“Here, one could say that there are two sides to the coin. If the refinancing rate decreases, then accordingly the yield on the coupon we pay will also decrease, and investors will receive somewhat less than, for example, the initially stated 10.5% annual yield. But this, in turn, means that certain processes are taking place in the economy that allowed the Central Bank to lower the refinancing rate,” Margaryan explained.

At the same time, if the rate remains unchanged, the bond’s yield also remains at the same level. In the example given by Margaryan, if the refinancing rate remains at 6% throughout all three years of the bond’s term, the coupon yield will remain at 10.5%.

“Everyone who initially purchased bonds with a yield of 10.5% will retain this yield throughout the entire term of the bonds. And if the Central Bank decides to raise the refinancing rate, then for the subsequent payments investors will already receive a higher yield,” he noted. 

According to Margaryan, it is precisely this possibility of yield growth when the Central Bank’s rate increases that is one of the mechanisms for protecting investors from changes in market conditions.