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
Figure 2. G-spreads on bonds of non-financial companies broken down into rating categories in June 2020 and duration categories*
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
Figure 4. Pairwise differences* of G-spreads on bonds with durations of up to three years issued by rating category AAA-AA issuers
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