Analytical commentary

The COVID-19 pandemic has impacted global financial markets in general and the Russian market in particular. Although the spread of the coronavirus continues to influence the market situation, ACRA believes it is already possible to assess how the first wave of the pandemic has affected the bond market and investors’ expectations with regard to future risks.

The G-spread indicator, which is defined as the difference between the effective yield to maturity/put option of an issue and the effective yield to maturity of a government debt issue, has been used in this analysis. The duration of bonds to maturity/put option was taken into account in the calculation of the G-spread. The G-spread determines the credit risk premium for a particular security, and the increase in the spread corresponds to the increase in the credit risk expected by investors.

ACRA compared G-spread* data for December 2019 and June 2020 for bonds issued by Russian non-financial issuers. The analytical sample includes issuers and issues with credit ratings.**

  • The risks of securities of non-financial companies in the AAA-AA rating category were not revaluated, as evidenced by a minimal change in credit risk premiums in the aforementioned period.
  • The biggest growth in risk premium in the A rating category took place in the non-food retail sector, while the indicator recorded moderate growth in other sectors.
  • The prices of securities in rating categories BBB and BB were the most volatile, which when coupled with the credit quality of their issuers, led to a significant revaluation in June 2020 compared to December 2019.
  • Investors continue to view real estate development as one of the most risky sectors, but when risks were revaluated, more attention is placed on the scale of companies’ activities.
  • According to the G-spread dynamics, investors noted significantly less growth in credit risk in the bonds of telecommunications companies, and representatives of the agriculture sector and food retail.

* G-spread indicator outliers have been excluded in this analysis.
** To ensure completeness of the market analysis, data on issuers and issues with credit ratings assigned by ACRA and Expert RA under the national scale were used. If an issuer or issue had credit ratings from both agencies, the credit ratings assigned by ACRA were taken into account.
Credit ratings were categorized as follows in order to visualize the data in graphs: AAA-AA corresponds to ratings from AAA to AA-, A corresponds to ratings from A+ to A-, BBB corresponds to ratings from BBB+ to BBB-, and BB corresponds to ratings from BB+ to BB-.

The lowering of the key rate is the main source of growth of both public borrowings and the number of investors.

The Bank of Russia’s considerable lowering of its key interest rate in 2019–2020 led to significant growth in the number of retail investors in Russia’s financial market. The fixed income market is attractive to them because bonds are similar to bank deposits as they provide fixed coupon income and have a set redemption or put option date. The reduction of the key rate made the public debt market more appealing to companies too, given the general fall in the costs of borrowing.

Figure 1. Dynamics of supply and demand in the Russian corporate bond market

Sources: Moscow Exchange, Cbonds, ACRA

The key rate declined from 7.75 to 4.25 pps from December 2019 to July 2020. On the back of this, the number of corporate bond issuers increased by 40%, the number of issues grew by 50%, and the number of unique clients in the Trading System of the Moscow Exchange more than doubled.

Figure 2. G-spreads on bonds of non-financial companies broken down into rating categories in June 2020 and duration categories*

* Duration categories: 1 — less than 18 months, 2 — less than three years, 3 — less than five years, 4 — more than five years.
Sources: Moscow Exchange, Cbonds, ACRA

G-spread dynamics for securities of issuers in the AAA-AA rating category

The growth in credit risk premiums for category AAA-AA was minimal.

The Russian debt market is mostly made up of issues of issuers from the AAA-AA rating category. The high credit quality of issuers and government support measures provided to the largest issuers have a positive impact on the level of risk of these securities. As a result, the growth in G-spreads on bonds of issuers from this category was within the margin of error during the analyzed period.

Issuers from the top rating category do not demonstrate considerable difference in the distribution of G-spreads by sector and have a wide range of durations, which is seldom the case with issuers with lower ratings. This lets investors create bond portfolios that are diversified in terms of sectors and have different investment horizons (with a comparable level of credit risk).

Figure 3. G-spreads on bonds with durations of up to three years issued by AAA-AA category issuers from various sectors

Sources: Moscow Exchange, Cbonds, ACRA

The deviation of G-spreads from the average in Fig. 3 is more a reflection of the different duration of the bonds than investors’ perceptions of the level of risk depending on sector (the differences between sectors flatten out at longer durations).

In the highest rating category, the change in G-spreads after the first wave of the COVID-19 pandemic was minimal. The pairwise differences in G-spreads in Fig. 4 are centered around zero.

Figure 4. Pairwise differences* of G-spreads on bonds with durations of up to three years issued by rating category AAA-AA issuers

* Pairwise difference is the difference between the level of G-spreads on bonds that were available in the market in December 2019 and June 2020.
Sources: Moscow Exchange, Cbonds, ACRA

G-spread dynamics for securities of issuers in the A rating category

The quarantine restrictions led to growth in risk premium in the non-food retail sector.

In general, bonds issued by non-financial companies in rating category A demonstrated similar G-spread dynamics to those of the bonds in the AAA-AA category. However, in connection with the higher level of risk, G-spreads on category A securities are on average 100 bps higher than the G-spreads on bonds issued by companies from rating category AAA-AA over the entire horizon of durations (Fig. 2).

Figure 5. G-spreads on bonds with durations of up to three years issued by rating category A issuers from various sectors

Sources: Moscow Exchange, Cbonds, ACRA

The first wave of the COVID-19 pandemic had the biggest impact on the other retail segment (non-food retail). The volume of sales in this segment fell after quarantine measures were imposed, while growth in the sales of food retail companies skyrocketed. This influenced the growth of G-spreads on securities of issuers that are part of the non-food retail sector (Figure 6).

Figure 6. Change in G-spreads on bonds with durations of up to three years issued by rating category A issuers from various sectors

Sources: Moscow Exchange, Cbonds, ACRA

Measures to support demand drove moderate growth in risk premiums in the real estate development sector.

The securities of issuers from the real estate development sector are traditionally viewed by the market as some of the most risky. However, measures to support demand (including widening the subsidized mortgage program) meant that investors only slightly revaluated the risks of the largest Russian real estate development companies, despite a short period of suspension of construction in Russia.

Figure 7. Pairwise differences of G-spreads on bonds with durations of up to three years issued by rating category A issuers

Sources: Moscow Exchange, Cbonds, ACRA

G-spreads on almost half of the bonds issued by issuers from rating category A grew by more than 25 bps (something which was not observed in the higher rating category), which is in line with moderate growth of credit risk.

G-spread dynamics for securities of issuers in the BBB-B rating category

This rating category represents the smallest number of issuers and issues in comparison with other categories, with real estate development dominating among the industries. Therefore, the analysis of G-spreads on bonds with BBB-BB ratings is somewhat limited.

Figure 8. G-spreads on bonds with durations of up to three years issued by rating category BBB-B issuers from various sectors

Sources: Moscow Exchange, Cbonds, ACRA

In the industry section, the dynamics of G-spreads in the rating categories BBB-BB and A are approximately the same, with the only difference being a higher risk assessment for real estate development companies. G-spreads on housing and non-food retail bonds in category A differed from the average level by 70 and 220 bps, respectively (Fig. 5), and in the BBB-BB category by 240 and 320 bps, respectively (Fig. 8).

Figure 9. Change in G-spreads on bonds with durations of up to three years issued by rating category BBB-B issuers from various sectors

Sources: Moscow Exchange, Cbonds, ACRA

Quarantine restrictions have led investors to re-evaluate the risks of bonds issued by issuers from the real estate development and non-food retail sectors. The largest change in G-spreads in the A category was in bonds of non-food retail companies, and in the BBB-BB category it was in securities of the real estate development industry.

ACRA believes that the change in investor attitude towards bonds of real estate development  companies depended primarily on the scale of these companies’ activities and diversified project portfolios that increase the stability of issuers during periods of declining economic growth.

General multidirectional dynamics of G-spreads

Spread volatility is not uniform. Risk premiums did not grow only for AAA-AA rating issues, while in the BBB and lower categories, there was faster growth in premiums for securities with longer maturities.

From December 2019 to June 2020, G-spread dynamics on bonds were multidirectional, which indicates an uneven reassessment of risks by investors.

  • There was no growth in G-spreads for bonds issued by issuers with the highest level of creditworthiness (AAA-AA), including for securities with a duration of more than three years. This indicates that this category is the most predictable for investors, including on the long-term planning horizon.
  • For securities issued by issuers from category A, G-spreads increased on average. However, as the duration of issues increased, they changed less significantly. This indicates that investors expect increased volatility for these bonds in the short term with issuer credit quality remaining the same over the long-term investment horizon.
  • For bonds issued by issuers of the BBB category and below, the picture is different: while G-spread growth is comparable in the short term with the dynamics on securities of the A category, issues with longer maturities are under pressure. Consequently, investors are less confident in the future of such companies, and the risks of their default in the long term are estimated higher.

The bonds of issuers belonging to the highest rating categories have yields at historical lows, while in the lower rating categories, yields have not yet returned to the minimum levels. ACRA notes that during the quarantine, the volatility of bonds in different rating categories differed significantly. This is due to the varying degrees of resistance of companies to such restrictions and the different probabilities of default on these issuers.

Figure 10. Debt yield indices

Source: Cbonds

Despite the overall decline of yields on risky corporate bonds in June 2020 relative to the levels of the end of 2019, it should be noted for investment purposes that securities of companies rated BBB-BB have a significantly higher risk than those of issuers rated AAA-AA and A.

Figure 11. Change in G-spreads on corporate bonds in the rating category by duration

Sources: Moscow Exchange, Cbonds, ACRA

Lower risk premium was observed in telecommunications companies, agribusiness, and food retail.

Based on the dynamics of G-spreads over the analyzed period, investors have become more loyal to bonds issued by telecommunications companies, representatives of food retail, and agribusiness. In these industries, the slight increase in G-spreads on short-duration BBB-BB rated bonds is due to the small number of these issues in the market (which increases the share of each securities issue in the calculation), as well as the presence of bond issues of telecommunications companies and agribusiness, whose G-spreads either increased slightly or decreased.

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Alexey Kornev
Expert, Corporate Ratings Group
+7 (495) 139-0480, ext. 126
Ekaterina Mozharova
Senior Director - Head of the Corporate Ratings Group
+7 (495) 139 04 98
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