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Index-Linked Bond “Oil Companies” Maturity Report

Underlying reference. The performance of the bond depended on the growth in the value of European oil and gas companies.

Index-linked bond performance review

The bond was structured to benefit from growth in the value of European oil and gas companies. The price of oil at the time of the bond’s issuance was fairly cheap, compared to recent history. At the same time global economic growth was improving and continuous stimulus by global central banks suggested good chances of further growth acceleration. Economic growth usually induces increase in demand for energy as industrial production grows while consumers use more fuel for travel. As a result, oil price outlook at the time of bond’s issuance was quite attractive. Thus, the bond provided an opportunity for investors to capitalize on that potential growth while avoiding complexity and volatility of direct investments into the price of oil.

Although global economic growth accelerated, as predicted, increased oil output from US shale oil produces created oversupply in the markets, keeping pressure on prices. Still, low global interest rates and increasing consumption let the companies to maintain profitability and their stock prices were gradually rising.

However, everything changed due to two extraordinary events that were impossible to predict. First, Russia and Saudi Arabia, two biggest oil producers, were not able to agree on cutting production and engaged in competition for market share, dropping the prices as a consequence. Then additional blow came from global COVID‑19 pandemic, which virtually suspended the global economy, resulting in rapid price decline of almost all assets.

Consequently, the 70% price barrier was hit, resulting in bond investors’ participation in the price decline of the reference index. Still, with slightly over 30% drop, the bond did much better than direct investment in oil price, which dropped close to 60% over the same period.

Index-linked bond performance

Further investments

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