Reassessment of risks in the Russian debt market

Growth in yield: reasons and current dynamics

A decline in prices for public debt obligations in all sectors of Russia’s bond market has been observed in the last quarter of 2021. The main factors determining these dynamics were the growth of the key rate and investors’ expectations regarding the further tightening of monetary policy by the Bank of Russia. In addition, negative news flow influenced prices during the aforementioned period, which resulted in a further increase in inflationary expectations in the Russian Federation.

In November, the potential restructuring or default of Rosnano JSC and investor’s risk-off sentiment on the back of the first reports about the new Omicron variant of the coronavirus also put pressure on debt obligation prices. In December, information surfaced about a potential new set of US sanctions that would be capable of further worsening the situation in the Russian debt market. Global markets have already won back some of the decline triggered by risk-off sentiment, as reports have surfaced that Omicron may be less dangerous than previous strains. However, this positive trend did not affect the Russian market, which is primarily due to the current geopolitical situation.

Today, the most pressing issue is the prospect of a further increase in the key rate at the Bank of Russia’s forthcoming meeting. The OFZ market foresees a hike of 100 bps, and there are several arguments in favor of this decision. Firstly, the latest data on inflation in Russia: according to Rosstat¹, cumulative inflation for 2021 (from the start of the year until December 6) amounted to 7.57%, which corresponds to annual inflation from November 2020 to November 2021 at 8.40%. Secondly, the gradual change in the rhetoric regarding inflation in the world’s leading economies: at his latest press conference², head of the US Federal Reserve Jerome Powell noted the growing threat of higher and more stable inflation, and also announced the likelihood of early completion of monetary stimulus in the United States.

Due to the lack of reliable and complete information about the new strain of COVID-19 at the moment, it is difficult to assess its danger to the population and its possible impact on the global and Russian economies.

¹ https://www.economy.gov.ru/material/directions/makroec/ekonomicheskie_obzory/o_tekushchey_cenovoy_situacii_8_dekabrya_2021_goda.html
² https://www.reuters.com/markets/us/powell-yellen-head-congress-inflation-variant-risks-rise-2021-11-30/

Figure 1. RGBI Index*

* Gross yield index for government bonds of the Moscow Exchange.
Source: Cbonds

Figure 2. Distribution of yield and duration for Russian OFZs

Source: Cbonds

Revaluation of risks for bonds issued by corporate issuers with high and medium credit ratings and by Russian regions and municipalities

When carrying out a detailed review of the changes in the corporate debt market, it can be noted that G-spreads (risk premium) grow mostly for bonds of issuers of low credit quality. This trend is explained by the fact that investors take into account higher risks associated with, among other things, growing refinancing risks. Given the likelihood of the Bank of Russia hiking its key rate by 100 bps in December, refinancing risks for companies with low credit quality have increased.

Next year, one of the key factors driving the probability of default for issuers with medium and low credit ratings will be the availability of a sufficient amount of committed and undrawn credit facilities provided by banks to such companies. Given the current situation, ACRA is keeping a close eye on the liquidity of companies in its portfolio. At the same time, the growth of spreads for medium/low credit quality issuers should not be called panic. For example, G-spreads on high-yield securities returned to the values of December 2020, so one can speak of the end of the cycle of excess free liquidity in the public debt market, which was associated with a period of very low interest rates, rather than panic among investors in the corporate debt market.

Figure 3. Cbonds-CBI RU High Yield YTM*

* Cbonds Index of High-Yield Bonds, Yield-To-Maturity (YTM).
Source: Cbonds

Figure 4. G-spreads for bonds issued by issuers with different credit ratings

Risk revaluation for bonds issued by highly rated issuers (above AA-(RU)) and by regions and municipalities was much less extensive than for high-yield bonds. This is partly explained by the fact that highly rated issuers are less exposed to refinancing risks after the surge in the key rate, and the global risk-off sentiment has less impact on such issuers. Nevertheless, a possible restructuring of the quasi-sovereign debt of Rusnano and a decrease in risk appetite in the global market led to risk revaluation on bonds of highly rated issuers (above AA-(RU)). Now investors are likely to start paying closer attention to SCAs³ (including those of quasi-sovereign companies), partially discounting the factor of the likelihood of extraordinary government support.

For bonds of highly rated issuers, the impact on credit risk evaluation was moderate: with a 240 bps increase in the G-spreads for high-risk securities in the period from November 16 to December 10, the growth in G-spreads for highly rated issuers amounted to 50 bps. The situation with Rusnano and the spread of the omicron strain of the coronavirus had the least impact on the bonds of regions and municipalities. The absence of defaults or restructurings in this segment of the debt market allows investors to remain calm about the risk premium: G-spreads on bonds issued by regions and municipalities decreased on average by 20 bps from November 16 to December 10.

The most sensitive to factors related to the current situation are bonds of issuers with medium and low credit ratings. If the Bank of Russia decides on December 17 to raise its key rate more significantly than market participants expect, G-spreads may further widen for companies with low credit quality due to a decline in their refinancing opportunities.

³Standalone creditworthiness assessment is an assessment of the creditworthiness of a company determined without the likelihood of extraordinary support from the government. 

The impact of credit risk revaluation on bonds issued by highly rated corporate issuers, as well as by regions and municipalities, has remained moderate. Most likely, this trend will not change in the long term.