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                                 Corduneanu Carmen
     West University of Timisoara, Faculty of Economics and Business Administration
                                   Milos Laura Raisa
    Eftimie Murgu University Resita, Faculty of Economics and Administrative Sciences


Bond issuing is a pretty used method of raising operating capital for most companies from developed
countries that detain mature capital markets. It is also true that in these countries, during the time,
there were taken a series of institutional and policy measures that have played an important role in the
development of their domestic bond markets. This has lead to a positive dynamics, proven by the
statistics. For example, the United States corporate bond market has been for a long time an
important source of finance for the private sector, while for Japan or for the European developed
countries, the corporate debt market has only lately matured. In our opinion, this was due to the
understanding by the authorities of the necessity of having deep and liquid bond markets in the
economy. Romania’s underdeveloped capital market has made this method of long-term financing to
be less appreciated among potential issuers. The authors make a short review of what has been done
in this area and what measures should be further taken for fostering the corporate bond market. More
recently, there has been taken into discussion the potential positive incentive that can be brought for
this market by the current financial crisis, having in consideration that during this difficult period,
investors are more likely to put their money into fixed income instruments. The authors are going to
analyze and give some arguments in favor or despite this believe, as far as concerns the Romanian
case. Moreover, the objective of the paper is to discuss some issues regarding the development of the
Romanian corporate bond market considering its dynamics between 2004-2008, evaluating some key
indicators (volume, value of issuing, offered yield), likewise estimating the future for this market. Not
at least, there are explained and compared the differences between the Romanian and some mature
corporate bond markets.

Bonds, capital market, financial crisis, corporate debt market

Bond issuing is a pretty used method of raising operating capital for most companies from
developed countries that detain mature capital markets. It is also true that in these countries,
during the time, there were taken a series of institutional and policy measures that have
played an important role in the development of their domestic bond markets. The
governments of such countries saw the role of provider of long-term funds of the bond
market and understood that a well-functioning bond market would help lower funding costs.
The taken measures have lead to a positive dynamics of this market, proven by the
international statistics. By comparison, in Romania, bond issuing is not one of the main
means of financing for the companies. Following the realized study, we noticed a lack of
diversification of the bond market, although it is allowed by the legislation. In our opinion,
this is due to the level of development of the stock market and to the fact that nowadays the
current demand for financial instruments is not directed towards fixed-income instruments,
with lower risk and lower return. Though, this thing can change in the near future. The
current process of globalization of the markets oblige the companies to design more
effective financing strategies in order to finance their investment projects in a competitive
manner. This may have a positive role in developing also the bond markets from emerging
economies. As the international experience shows, bond financing turns out to be an
alternative to the traditional bank financing for the companies. It is also true that an increase
of this type of financing leads to a deepening of the domestic capital market, especially in
what concerns the emerging ones.

In the context of the current international financial crisis, there are various opinions in
favour for the development of the bond markets, giving the current situation. It is thought
that the bond market could be fostered by an increase in the demand of bond issuings of the
companies, once with the rose of the interest rates for bank loans. Secondly, in period of
financial crisis, of high volatility on the markets, investors are likely to change the structure
of their portofolios, acquiring more fixed-income instruments. The current turmoil in mature
credit markets has highlighted that policymakers and market participants should aim to
foster a strong institutional structure for local currency bond markets. Given the current state
of development of the domestic corporate bond market, we are reluctant in seeing the
financial crisis as having a major impact on fostering the domestic bond market. Though, we
think it may have a positive impact on the long-run.


As far as concerns the Romanian corporate debt market, it is not surprising that this is
insufficiently developed, given the lack of issuance in the primary market and of the
liquidity in the secondary market, on the BSE. Through the main reasons for the lack of a
functional and developed capital market we can mention the instability of the legislative
framework, the reduced profitabilility in the economy, high interest rates and the increased
inflation (until 2005, when the monetary policy had the inflation targeting as one of its main
priorities). At the end of the year 2007, at the Bucharest Stock Exchange were traded 23
bonds, through them only 6 corporate bonds (in comparison with 7 at the end of 2006 and 6
at the end of 2005). Nowadays, the situation is even more accute, with only 2 corporate
bonds trading on the domestic capital market. Moreover, if we analyse the total trade value
of bonds, regardless the type, in 2007, it has reached 794,3 million RON (233,5 million
Euro), declining with 19,4 % in comparison with the previous year. As far as concerns the
structure of the stock exchange transactions, only 8,52 % is owed to the bond sector, the
equity transactions accounting for 91,47 % of the total amount.

           3.20%                 5.32%

        0.01%                                                      Rights

                                                                   Romanian bonds

                                              91.47%               Foreign bonds

                           Fig. 1. Structure of the stock trading in 2007
                       Source: realized by authors with dates provided by BSE
It is obvious that the bond trading is by far less interesting for the investors than the equity
trading. This certainly leads to a reduced liquidity for the bond market. The first initiative
for issuing corporate bonds belonged to International Leasing, in may 2000, with a total
issue value of 2,2 billion RON and with a maturity of 18 months. Since then, there have
been developed on the market no more than 15 public offers for corporate bonds, this
number dropping in the last period but being characterised by an increase in the maturity
and in the issued value. The average rate of interest reached in 2007 the value of 8,10 %,
surpassing the bonification for the bank deposits at that time.

    20%       18.72%                                               7          Average rate of
    18%                                                                       interest for
    16%                                                            6          corporate bonds
    14%                                                                       (left scale)
    12%                                                            5
                                          9.24%                               Number of
    10%                                                8.10%
     8%                     6.89%                                  4          corporate bonds
     6%                                                                       (right scale)
     4%                                                            3
     0%                                                            2
               2004          2005         2006          2007
   Fig. 2. Corporate bonds yield and the number of corporate bonds realized in the
                                   period 2004-2007
                     Source: realized by authors with dates provided by BSE

Nevertheless, in contrast with the government bond market and the municipal bond market,
that has made significant strides in both primary and secondary market, the Romanian
corporate bond market remains largely underdeveloped and illiquid. Moreover there is no
diversification of this market, missing the mortgage bonds, that contribute in a significant
way to the development of the bond markets in countries that detain mature capital markets.
The limited range of debt instruments and investment opportunities are perceived to be a
major constraint in the development of the corporate bond market. In the absence of a
product range and investment opportunities, which provide an exit route, investors are
compelled to hold the investment to maturity or incur heavy costs to raise the desired


At the international level, bond issuing is becoming more and more frequent as alternative
source of financing the companies´ activity. We can easily notice that the amounts
outstanding on the global corporate debt market increased over the latter period, whenever
we take into consideration the developed European Union countries, USA or Japan (Fig.3).
After a long-lasting period of relative constant volume of issuings, the European corporate
debt market began in 1998 an expansion trend, which still continues. As in the case of the
American market, the corporate bond market is dominated by the financial corporations that
are high value bond issuers. This is due to the intense activity of the banks on the capital
market, as well as to the importance of financial liberalization and deregulation of the
banking sector. Moreover, the lack of currency risk in the Euro Zone has led to an increased
attractiveness for the corporate debt market. The constant growth of the corporate bond
market, measured as percent of GDP proves once more the importance of this sector for
financing the companies and its positive dynamics over the time, regardless the geographical
area. It is also true that the development of this market occured as well due to the financial
globalization process, consequently to the intensification of financial transactions between
countries, to the financial liberalization that fostered the global competition for finance. Not
at least, the decreasing rates of inflation have fostered the investment climate and
encouraged the financial transactions.

               1998   1999   2000   2001   2002   2003    2004   2005   2006   2007

                       Euro area                    USA                        Japan

Fig. 3. Dynamics of bond markets in the financial triad Eurozone-Japan-EA (bill.Euro)
                     Source: realized by authors with dates provided by ECMI

If we take into consideration only the European Union countries we can notice the important
advance made by this market in the analysed period of time (1989-2007). This was due
mainly to the dissapearance of the currency risk for the Euro zone countries that has
encouraged the bond issuers to finance their activities through such financial instruments.

            Fig.4. Dynamics of European corporate bond market (billion $)
    Note: there are only illustrated the bond issuings realized by nonfinancial companies
                                  Source: DCM Analytics, Datastream

The Romanian bond market cannot stay immune to what happens on the global capital
markets. As far as concerns the mature economies, bond markets are very developed. A
growing number of emerging market economies have made also considerable efforts in
order to develop the domestic capital market. Where the Romanian bond market is heading
will depend on the institutional effort meant to foster the domestic bond market. However,
giving the current financial crisis and the fact that the institutional investors are becoming
more and more present on the Romanian capital market, we strongly believe that in the near
future, in the context of financial globalization, the domestic bond market will develop.


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