Debt market bulletin

Issue III: Q3 2023

ACRA presents the third issue of its Debt Market Bulletin, which describes the current situation and trends in Russia’s fixed income and public debt market.

• In Q3 2023, bond yields in both the government and corporate sectors increased significantly against the background of a sharp increase in the Bank of Russia’s key rate.

• In the primary market, activity was slightly higher in July to September than in Q2, as issuers retained their plans to make placements against the backdrop of an expected further increase in the rate.

• The issuance of replacement bonds continued, but the dynamics of their placement slowed down. At the same time, the potential for the issue of these bonds is estimated at another USD 15–20 bln.

• No refusals to fulfill obligations have been recorded so far, however, given the rising cost of refinancing, ACRA does not rule out the possibility of defaults in the future by issuers with liquidity problems.

• The DFA market continued to develop and exceeded RUB 30 bln in Q3.

Current state of the debt market

The main challenge for the Russian bond market since the start of 2023 was the hike in the key rate over the past three months from 7.5% to 13%. This was the Bank of Russia’s reaction to an increase in aggregate domestic demand that exceeded the possibilities for expanding output (which amplified persistent inflationary pressure and influenced the dynamics of the ruble exchange rate).

Over the past four months, the total volume of ruble-denominated bonds in circulation increased by 4.5% to RUB 42 tln, with corporate bonds accounting for the most growth (+5.4%). Non-financial companies increased their debt the most actively, having raised over RUB 500 bln in the domestic debt market, which amounts to more than 4% growth over this period (Table 1).

Table 1. Bond market structure by outstanding nominal value, RUB bln

In Q3, the highest activity in placements in the corporate segment was among companies in the oil and gas, transport and construction industries (Fig. 1). The largest volume of borrowings came from first- and second-tier issuers, while high-yield bond issuers borrowed almost five times less on the market than in Q2.

Figure 1. Industries of new issuers

The state, represented by the Russian Ministry of Finance raised around RUB 700 bln in Q3 via OFZs, a 50% increase compared to Q2. However, in September, amid growth in the interest rate, these dynamics slowed and the total volume of funds raised amounted to RUB 90.3 bln, which is 2.7 times smaller than in August (RUB 246 bln). As a result, the plan to raise funds was 70% fulfilled (details about the structure of consolidated public debt are provided in the Appendix). The Ministry of Finance was not ready to provide an additional premium to market participants and, in turn, they were not willing to purchase debt obligations on the Ministry’s terms.

In these conditions, the most popular bonds among market participants were those with floating coupons (their share in primary placements grew to 80% by the end of the quarter) because in the event of a rise in the key rate, the purchase of these financial instruments allows the decline in the value of securities in the portfolio to be minimized.

As usual, the main buyers of government bonds in the primary market were major banks, while corporate bonds were purchased by individuals, the activity of which also grew in the secondary market. According to the Moscow Exchange, individuals invested around RUB 67 bln in the Russian debt market in September (a monthly record). The Moscow Exchange announced that the share of individual investors in the volume of bond trading stood at 30% in September.¹

The current structure of the corporate debt market, based on the credit risks of issuers and the volume of bonds issued by them, is shown in Fig. 2–3. The bulk of the market (54%) is first-tier bonds represented in most cases by quasi-state and municipal debt obligations. Second-tier bonds account for 26% of the market, while issuers from the high-risk segments and issuers without credit ratings together account for around 20% of the market. At the same time, the number of issuers who do not have ratings and third-tier issuers account for 66% of all borrowers, which indicates a significantly lower volume of issues from these market participants.

¹ https://www.moex.com/n64440?nt=106

As shown in Fig. 4, since the beginning of the year, during the period of low rates in the market, the activity of borrowers of all risk groups was quite high. However, in the second and third quarters, the cost of borrowing for issuers with low credit quality either remained at a stable level or decreased, while for issuers with higher credit quality, on the contrary, rates increased (especially in the third quarter). This indicates an increase in borrowing costs for the most stable issuers, on the one hand, and increasing disproportion between tiers, on the other (Fig. 5).

* Coupon rate for 3-year corporate bonds issued in the analyzed period. The sample only includes market exchange-traded issues, including non-financial companies, banks, and financial institutions.
Sources: Cbonds, ACRA

If we analyze the dynamics of yields in the ruble debt market (Fig. 6), the rate increase led to a revaluation of bond yields. Corporate bond yields increased by 300 bps on average in Q3, while there was a narrowing of spreads between tiers of bonds of high-quality and riskier issuers (at the beginning of the year they were twice as large). This indicates that the current increase in yields is associated, on the one hand, with the rate increase (and not with the expectation of an increase in corporate debt risks), and, on the other, with lower liquidity and an increasing divergence between the fair value and close price.

Figure 6. Difference in yields of issuers

Sources: Cbonds, ACRA

In Q3, government bond yields in the middle and short sections of the curve increased by 400–450 bps. Note the inverted nature of the G-curve in its short section (Fig. 7) and the negative spread between the key rate and the government debt curve. This allows us to conclude that market participants are highly likely to expect a continuation of the cycle of raising the key rate, which was indirectly confirmed recently by the Bank of Russia.

Figure 7. OFZ curve dynamics

The average daily trading volume in the government bonds segment (Fig. 8) gradually increased in Q3 and reached RUB 20 bln in September (about RUB 10 bln at the beginning of the quarter). The average daily trading volume in corporate bonds, on the contrary, decreased and amounted to RUB 4 bln in September, while at the beginning of the quarter the average was RUB 14 bln per trading session. This indicates that trading activity is decreasing in the secondary market and bonds are moving into long-term portfolios until maturity.

Figure 8. Exchange trade turnover for OFZs and corporate bonds, RUB bln

Replacement corporate bonds have shown a decrease in yields against the background of high demand from market participants. In September alone, issuers with a total supply volume of about RUB 24 bln entered the market. According to Decree of the President of the Russian Federation No. 364 dated May 22, 2023, the replacement of Russian issuers’ Eurobonds must be completed by the end of this year. About half of these financial instruments (with a volume of about USD 15–20 bln) is highly likely to undergo the replacement procedure. At the same time, further issuances will depend on the issuers who may refrain from the replacement procedure by obtaining the appropriate permission. It is worth noting that these issues are in demand among institutional investors, since the yield on some bonds exceeds 4–5%, which, taking into account swap transactions, gives a good yield in ruble equivalent.

In Q3 2023, the DFA market showed moderate growth. Over 80 new issues have been placed in this segment, most of which represent short-term and relatively small direct payment demands to issuers. The number of data system operators (DSOs) has increased to 10. Atomize, Sber and A-Token (the DFA issuance platform of JSC “ALFA-BANK”) are the leading DSOs in terms of the number of issues, accounting for about 90% of all new issues. In addition, the Moscow Exchange has become the first in the market to obtain a DFA exchange operator license, which should contribute to the formation of the secondary DFA market and the expansion of the investor base. ACRA expects further development of DFA instruments, including DFAs secured by monetary claims against third parties, as well as hybrid DFAs (including, in particular, utilitarian digital rights). In September 2023, ACRA was the first Russian credit rating agency to approve a Methodology for Assigning Credit Ratings to Digital Financial Assets.

Credit rating coverage of the corporate bond market

Issuers’ credit risks

In Q3 2023, no issuer defaults were observed in the Russian bond market, with the exception of the technical default of Agrofirma — Pobeda Breeding Farm JSC that paid the 10^th coupon of RUB 24.3 mln on its series 001P-01 bond only a week after the due date. The default occurred due to enforcement proceedings with respect to the company.

As mentioned above, there were no defaults of new issuers in the third quarter, however, a potential hike in the rate increases the risks for companies that depend heavily on refinancing. With this in mind, ACRA considers it important for potential investors to pay attention to ACRA’s credit ratings, which reflect the Agency’s opinion on the probability of default of rated entities. At the same time, ACRA does not expect mass defaults in the bond market in the coming months in the absence of new black swans.

The Agency continues to calculate, on a monthly basis, the Rating Action Index for the two largest Russian credit rating agencies, which reflects the dynamics of the agencies’ assessments of their clients’ creditworthiness (Fig. 9). The index has been calculated since the beginning of 2020. Since the start of this year, the number of credit rating upgrades has so far exceeded the number of downgrades, which may indicate the stable position of corporate clients included in the portfolios of the two largest rating agencies in the current difficult economic situation. 

Figure 9. Rating Action Index

Like in Q2 2023, more than 83% of outstanding bonds are currently covered by credit ratings (Fig. 11). The number of issuers with high or moderate credit quality (Fig. 10) exceeds the number of issuers with low credit quality (with the exception of non-rated issuers). Therefore, 80% of the bonds of the total outstanding public debt have ratings of A- or higher on the national scale for the Russian Federation, which corresponds to the probability of ACRA’s expected one-year default rate of less than 1.5% in the ruble bond market.

In conclusion, it should be noted that in the remaining period of 2023, according to ACRA’s estimates, the number of IPOs in the bond market will decrease, taking into account the key rate hikes expected by market participants, while bonds with floating coupons or par value will be in the greatest demand. At the same time, the activity of borrowers with low credit quality will decrease faster than the growth of the number of issuances made by issuers with high credit ratings. A decrease in risk appetite and the need to provide an additional premium to bonds issued by highly rated issuers will conflict with the capabilities of issuers with low credit quality.

Figure 10. Number of issuers by rating

Source: ACRA

Figure 11. Volume of outstanding bonds by rating, RUB bln

Source: ACRA

Appendix. Structure of Russia’s public debt, RUB bln

² Hereinafter, for Q3 2023, GDP for the past four quarters available is used.
³ External and internal debt breakdown in accordance with the Budget Code of the Russian Federation.