Will the debt market be able to recover quickly again?

• After September 21, G-spreads for ruble bonds issued by Russian non-financial issuers returned to their April 2022 levels.

• The maximum values of risk premiums for bonds were recorded as of the end of March and the start of April 2022 when the key rate was at historic highs.

• G-spreads declined from April to September this year, however they were still much higher than in 2021.

• Average growth of risk premium for each credit rating notch increased by 37% (from 62 bps to 85 bps).

• Investors expect the market situation to stabilize in the long term for issuers with very high rating categories, while a narrowing of spreads is not expected for the bonds of issuers who have lower ratings.

• More significant growth of G-spreads of the bonds of the high-yield segment may indicate higher refinancing risks for these issuers.

G-SPREADS DURING HIGH VOLATILITY

To analyze risk premium, a G-spread was used that takes into account both the difference between effective yield to issue maturity/option date and the effective yield to maturity of an issue of government debt. G-spreads determine the credit risk premium of a security, while the growth of the spread corresponds to the reassessment by investors of the credit risk of the security relative to government obligations.

ACRA used G-spread¹ data for ruble-denominated bonds issued by Russian non-financial issuers in September and during the period fr om March to July 2022. The analytical sample included issuers and issues with credit ratings².

The values of the High Yield and Middle Market Investable Indices³, which exceeded 2,500 and 1,300 bps in March, had fallen to 700 bps and 460 bps, respectively, by mid-September 2022. After September 21, given the geopolitical changes, the risk premium for these securities increased, while the values of the indices returned to April levels.

¹ The analysis excludes G-spread outliers.
²  Data on issuers and issues with ACRA and Expert RA credit ratings under the national scale were used in order to cover the market more widely. ACRA’s ratings were used if an issuer or issue had credit ratings from both agencies.
Credit ratings were combined using the following categories to demonstrate data on graphs: category AAA–AA includes ratings from AAA to AA-, category BBB includes ratings from BBB+ to BBB-, category BB–B includes ratings from BB+ to B-.
³ The Cbonds-CBI RU High Yield Index reflects the Russian market of high-yield corporate bonds. The Cbonds CBI RU Middle Market Investable Index reflects the ‘average’ market of liquid corporate bonds of the Russian Federation, which includes securities of issuers with credit quality from BB+ to A+ (inclusive) under the national scale (or an analogue under the international scale).

Figure 1. Bond yield indices

Source: Cbonds

Amid the overall increase of yields after September 21, the more uniform reassessment of the risks of debt obligations from issuers of different rating categories in comparison with volatility in the period from February to March should be noted. Risk premiums of securities that are high-yield according to the Cbonds index and those that are part of the Cbonds broad bond market index have doubled — from 700 bps on September 20 to a September peak of 1,400 on September 27, and from 460 bps to 1,036 bps, respectively. From February to March, the G-spreads of securities of highly profitable companies increased by 2,560 bps (from 400 bps in February to almost 3,000 bps in March), while the broad market bond index posted growth of 1,050 bps (from 250 bps to 1,300 bps). The more significant increase of G-spreads of high-yield segment bonds is due to higher liquidity deficit risks for these issuers, as well as their lower resistance to shock events in the economy compared to companies from high rating categories.

Besides the overall increase of G-spreads, growth of risk premiums for each credit rating notch should also be noted. Prior to September 21, each credit rating notch on average corresponded to the risk premium declining by 62 bps; after September 21, this had increased to 85 bps. The largest change is observed among the securities of issuers with low credit ratings.

* For representativeness, the calculations used issues with durations of up to three years; the graph only shows national scale ratings.
Sources: Cbonds, ACRA

After September 21, 2022, the values of G-spreads for bonds in the rating category AAA–AA increased on average by 46.8 bps (+44%) compared to risk premiums in early September, in category A — by 105.7 bps (+35%), in category BBB — by 170.6 bps (+30%), and in category BB–B — by 335.8 bps (+46%).

Figure 3. G-spreads for bonds of non-financial companies in September 2022 by rating category and duration category*

The main revaluation of risk premiums occurred on the short and medium segments of the yield curve for all rating categories, except BB–B, wh ere revaluation also affected the long segment. These dynamics are explained both by the greater sensitivity of issuers of lower rating categories to shocks, and by the small number of observations in this rating category. In ACRA’s opinion, the current dynamics of risk premiums may indicate significant difficulties for issuers of this group in terms of access to the bond market, which may increase refinancing risks on the horizon of six months.

PERFORMANCE OF THE RUSSIAN CORPORATE BOND MARKET IN 2022

Despite the narrowing of spreads by the end of summer following a period of high volatility from February to March, a noticeable recovery of activity in the debt market in terms of the number and volume of placements is not expected until the geopolitical situation stabilizes.

After the Bank of Russia hiked its key rate from 9.5 pps to 20 pps amid the imposition of anti-Russian sanctions by a number of countries, participants of the Russian debt market faced a significant degree of uncertainty. The high key rate coupled with geopolitical shifts sharply increased the cost of financing and cut liquidity in the public debt market. The fact that most companies do not have any opportunities to refinance their obligations in the public debt market has increased the risks of liquidity shortage and refinancing. It should be noted that the preferential lending measures announced at that time smoothed the shocks for large systemically important enterprises.

The number of placements and volume of deals from February to July 2022 was, as expected, considerably lower than in the same period in 2021. In March 2022, 11 new corporate bond issues were placed vs. 57 in March 2021, while the volume of new market placements of corporate bonds was RUB 30.2 bln compared to RUB 152.7 bln in the same month last year.

⁴ACRA used the moving average 3 to smooth peaks for individual months.

In ACRA’s opinion, on September 16, 2022, the 50% decrease in the key rate to 7.5% (the level of December 2021) provided additional support to the public debt market. However, new geopolitical changes will impair the market, since borrowing costs have grown for companies on the back of higher uncertainty for investors and lower predictability of corporate financial performance. The Agency assumes that without sharp changes to macroeconomic indicators, the bond market plunge may turn out to be not as deep and prolonged as it was from February to July 2022. 

dynamics of G-spreads for bonds of issuers in the AAA–AA rating category

Non-financial companies have issued about a third of securities rated AAA–AA in the Russian debt market. The sample of companies is diversified by industry: oil and gas industry and mining, electric power (generation and grids), transport, machine building, chemical industry, telecommunications, etc.

The bonds of companies rated AAA–AA have a wide range of durations (from one to four years), and the companies themselves are relatively evenly distributed among them, which is rare for issuers with lower ratings. These bond issuers boast high credit quality, and therefore, after September 21, G-spreads for their securities increased less significantly: G-spreads for bonds with durations of up to one-and-a-half years increased by an average of 106 bps, while those with durations of one-and-a-half to five years grew by an average of 40–60 bps. A significant increase of G-spreads was observed only for some issuers, while spreads for bonds of most companies of this rating category remained in the range of up to 300 bps, and spreads for securities with durations of five or more years even decreased by an average of 17 bps. This is because this rating category contains a large number of government-owned companies.

For comparison, in the period from June to July, risk premiums for securities with durations of up to one-and-a-half years increased by an average of 100 bps vs. January, for securities with durations of one-and-a-half to five years, risk premiums grew by 60–70 bps, and with durations of five years they increased by 20 bps. As the duration increases, spreads shrink, which indicates a high degree of investor uncertainty in the short and medium term, and expectations of market stabilization in the long term.

Figure 5. G-spreads for bonds of issuers in the AAA–AA rating category in September 2022

dynamics of G-spreads for bonds of issuers in the A rating category

Since September 21, for the A category, credit risk premiums have grown on average by 1.4 times (by 105 bps) compared to early September this year

Bonds issued by non-financial companies in category A hold second place in terms of presence in the debt market. These issuers are mainly companies from the residential development, machine building, and food industries.

Bonds in this category have a range of durations from one to three years, and the distribution of G-spreads is uneven, with scarce outliers. After September 21, spreads for securities with durations of up to one-and-a-half years on average increased by 234 bps, for securities with durations of one-and-a-half to three years — by 94 bps, and for securities with durations of three years decreased by 10 bps. In the period from June to July, risk premiums for securities with durations of up to three years increased by an average of 210 bps compared to January this year, and for securities with durations of three years they increased by an average of 70 bps. Similar to the AAA–AA category, risks were revaluated mainly in the short and medium-term sections of the yield curve.

G-spreads for securities in category A exceeded G-spreads for bonds of issuers in category AAA–AA over the entire horizon of durations: on average by 180 bps before September 21, and by 217 bps after September 21.

Figure 6. G-spreads for bonds of issuers in the A rating category in September 2022

dynamics of G-spreads for bonds of issuers in the BBB rating category

Since September 21, for the BBB category, credit risk premiums have grown on average by 1.3 times (by 170 bps) compared to early September this year.

The sample of bonds issued by rating category BB–B issuers is quite limited both in terms of the number of bonds issued and in terms of the industry that issuers belong to (mainly wholesale trade, residential development, and infrastructure construction), which complicates the analysis of this rating category.

Bonds of issuers with BB–B ratings, as well as bonds of issuers in the BBB category, mainly have durations of up to two or two-and-a-half years, while the distribution of G–spreads is concentrated under the line with surges on bonds with durations of one to three years. Before September 21, risk premiums for BB-B category securities with durations of up to one-and-a-half years averaged 877 bps, for those with durations of one to three years they averaged 1,135 bps, and for those with durations of three to five years they averaged about 565 bps. After September 21, risk premiums for bonds with durations of up to three years increased to 1,250–1,315 bps, and for those with durations of three to five years they increased to about 1,000 bps.

After September 21, risk premiums for BB–B category bonds with durations of up to three years exceeded the G–spreads for BBB category bonds by an average of 400–470 bps, for bonds with durations of three to five years — by 600 bps (yet before September 21, the difference between G-spreads for BB–B category bonds with these durations and G-spreads for BBB category bonds with the same durations was about 170 bps).

Figure 8. G-spreads for bonds of issuers in the BB–B rating category in September 2022