In 2024, five companies in the Russian corporate debt market defaulted on their bonds: QIWI Finance LLC, Zavod KrialEnergoStroi LLC (Zavod KES LLC), Nika LLC, Fabrika FAVORIT LLC, and Rosgeo JSC. The total volume of corporate bonds for which defaults were recorded amounted to approximately RUB 16 bln (including RUB 8.2 bln for the bonds of QIWI Finance LLC and RUB 6 bln for obligations of Rosgeo JSC).
QIWI Finance LLC defaulted due to the revocation of the license of QIWI Bank (JSC), while Zavod KES LLC and Fabrika FAVORIT LLC were unable to fulfill their obligations after their bank accounts were frozen by decision of the Federal Tax Service of Russia.
Rosgeo JSC’s bond default forced bond market participants to focus more on assessing the risks of issuers related to the state and dependent on state support.
In the conditions of the Bank of Russia’s tight monetary policy, the risks of refinancing previously issued bonds generally remains heightened for company with low liquidity and coverage metrics. At the same time, the overall default rate remains very low at less than 0.1% of the total volume of corporate bonds at outstanding par value at the beginning of 2024). This suggests that rising interest rates has had a limited impact on the financial strength of non-financial companies over the past year.
As part of this analytical commentary, to determine the extent of deterioration of the debt burden of Russian companies in the conditions of a prolonged period of high interest rates, non-financial companies that are part of ACRA’s rating portfolio were analyzed for their grouping by debt burden levels, debt coverage indicators and liquidity.
The characteristics of sample upon which the analysis was carried out are provided in Fig. 1–2.
Hereinafter, the following breakdown by tiers is used:
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Tier 1 — companies rated AAA on the National Scale for the Russian Federation;
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Tier 2 — companies rated AA and A;
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Tier 3 — companies rated BBB and lower.
DEBT BURDEN
The ratio of total (net) debt to FFO before net interest payments was used as the indicator to characterize the level of the debt burden. This indicator, used by ACRA in the analysis of non-financial companies, reflects the coverage of the debt burden by operating cash flow before the movement of working capital and interest payments.
The threshold values that determine the assessments used are:
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Very low —1 and lower;
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Low — 1 to 2 inclusive;
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Medium — 2 to 3.5 inclusive;
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Above medium — 3.5 to 5 inclusive;
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High — more than 5.
Figure 3. Distribution of companies by debt burden level by tier
Source: ACRA
The figures above show the current cross-section of the debt burden of companies included in ACRA’s analytical sample.
INTEREST PAYMENT COVERAGE
Fig. 4–6 show the distribution of companies by debt service ratio, which is the ratio of FFO before net interest payments to interest payments. This indicator is key for assessing the interest burden of non-financial companies from a wide range of industries.
Below are the thresholds for the assessments used:
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Very high — 20 or more;
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High — from 10 inclusive, but less than 20;
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Medium — from 5, but less than 10;
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Below medium — more than 1 but less than 5;
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Low — less than 1.
Figure 4. Tier 1 (ААА)
Source: ACRA
Figure 5. Tier 2 (АА–А)
Source: ACRA
Figure 6. Tier 3 (ВВВ and lower)
Source: ACRA
The volume of publicly traded instruments issued by issuers with low coverage is about RUB 16.5 bln in ACRA’s sample.
The current year’s scenario, which the Agency applies in calculating the interest on floating-rate bonds (floaters) and variable-rate credit lines, includes the following assumptions:
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Annual average key rate (KR) at 20%;
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Expanded spreads, in case additional funding is needed:
— Tier 1 — KR + 2%;
— Tier 2 — KR + 4.5%;
— Tier 3 — KR + 7%.
When calculating interest coverage indicators, ACRA used available information on changes in companies’ net debt in 2025 and planned changes in FFO (companies’ plans and ability to add additional interest burden to the cost of their products or services were taken into account, as well as ACRA’s analytical assumptions, taking into account the development factors of relevant industries).
The Agency also took into account the limited capacity of a number of companies to borrow in the current environment and the need to refinance obligations that are due in 2025, taking into account current market rates (depending on the tier) and excluding options:
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Tier 1 — RUB 653 bln, sample — RUB 534 bln;
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Tier 2 — RUB 521 bln, sample — RUB 402 bln;
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Tier 3 — RUB 56 bln, sample — RUB 10 bln
The situation with coverage of interest expenses is deteriorating across all tiers this year. Nevertheless, around 59% of companies in Tier 1 have a coverage rate of more than 5, and 41% of companies have a coverage rate of more than 1. In the Tier 2, there are also almost no companies with interest expense coverage at less than 1, and most of have an indicator from 1 to 5. Consequently, there is slight deterioration in the situation with interest expense coverage compared to last year (it is important to note that 2024 was not marked by a large number of defaults).
The situation in Tier 3 looks predictably worse than in the first two, but most companies in the ‘red zone’ in terms of interest coverage have fairly low credit ratings, which indicate an increased probability of default relative to other issuers (B–BB on the national scale for the Russian Federation).
Note that more than 77% of the public debt of companies in ACRA’s portfolio (around RUB 11.19 tln) has fixed coupons, which is positive for issuers in the current conditions. Fixed rates on bonds included in ACRA’s rating portfolio are shown in Table 1.
Table 1. Fixed rates on the bonds in ACRA’s portfolio
|
|
Ruble-denominated bonds |
Foreign currency-denominated bonds |
|
Average rate |
13.49% |
4.98% |
|
Weighted average rate |
12.81% |
5.21% |
Source: ACRA
A significant number of companies that have a reserve of free liquidity in their accounts can place this liquidity in bank deposits and receive significant interest income in conditions of high interest rates.
The dynamics of the median indicator, the ratio of FFO before net interest payments to interest payments, is shown in Fig. 7–8 (the indicators for the sample for 2023–2025 are broken down by tier and industry).
Figure 7. Median interest coverages by tier
Source: ACRA
Figure 8. Median interest coverages by industry
Source: ACRA
LIQUIDITY
The key factor in avoiding default amid a decrease in interest coverage remains the possibility of obtaining emergency financing through open credit lines or new bond issues. In this regard, the assessment of available liquidity, including for emergency refinancing, plays an important role.
ACRA forms its opinion on the liquid position of a rated entity in the short and medium term based on a comparison of its assets and liabilities with sources of liquidity over a relevant time horizon. The assessment takes into account both external sources of liquidity (open credit lines, as well as new bond issues underwritten by investors) and internal sources (account balances, cash flow surplus from current operations). First of all, guaranteed sources of liquidity are taken into account, as well as committed undrawn bank credit lines.
Figure 9. Companies’ liquidity by tier
Source: ACRA
Fig. 9 shows the distribution of liquidity assessments based on the rating models for companies in the respective tiers. The availability or lack of available liquidity is one of the most significant factors contributing to the potential default of companies.
High liquidity indicators of companies are characterized by comfortable repayment schedules for current liabilities in the medium and long term, diversified sources of internal and external financing, and a margin of safety under the covenants in loan agreements.
Low and extremely low liquidity indicators reflect companies’ increased need to refinance current liabilities in the next one to two years. Debt financing raised by these companies is mainly of a short- and medium-term nature, assets and liabilities are not balanced in terms of maturity, and there may be peak debt repayment periods in the medium term. Their possibilities of attracting emergency liquidity are significantly limited, which may become a factor of a potential default.
Companies in Tiers 1 and 2 generally have high liquidity assessments, reflecting a greater margin of safety relative to companies in Tier 3. Many large companies, among other things, have begun to reduce or postpone capital and investment projects in order to reduce current costs and maintain the liquidity cushion as necessary to cover increased debt servicing costs.
The volume of public debt instruments of the companies in the sample, whose liquidity levels are estimated to be low and extremely low, is about RUB 3.5 bln.
The total volume of public debt instruments of the companies in the with low liquidity indicators or instruments with low interest coverage is about RUB 19.2 bln.
CONCLUSIONS
Given the tight monetary policy pursued by the Bank of Russia and other measures taken by it to restrain lending activity in the market (in addition to the key interest rate), credit institutions are adhering to a more balanced lending policy. When opening new credit lines, banks, among other things, take into account the dynamics of borrowers’ debt burden amid rising interest rates, which may negatively affect the ability of borrowers to attract emergency refinancing in case of need.
In this regard, the role of the debt market and bonds as a tool for raising funds for refinancing purposes, as well as the role of other sources of liquidity, such as individuals and institutional investors (other than banks), is becoming more important.
With high interest rates remaining on the horizon of one to two years, and on the backdrop of the gradual replacement of earlier fixed-rate instruments with new issues placed at current rates, companies’ creditworthiness may tend to worsen.
However, based on:
(1) current debt burden, debt coverage and liquidity of non-financial companies in the sample,
(2) current indicators of the liquidity and quality of loan portfolios of Russian banks, and
(3) potential additional ‘liquidity overhang’ from individuals in the market amid declining deposit rates,
in the next three to six months, ACRA does not expect the ability of non-financial companies to attract funds for refinancing purposes (both through credit lines and on the bond market) to deteriorate and, as a result, a significant increase in the number of defaults on the bond market compared to last year.
The probability of default expected by the Agency on the horizon of 12 to 18 months is reflected in its current credit ratings (https://www.acra-ratings.ru/ratings/issuers/?lang=en).
