The Bond Market and Its Future Development. Are There Any Chances for 3rd-Tier Companies?

Alexander Khlopetsky
Vice President, Fixed Income Department
National Bank Trust

This year the 2nd-tier issuers dominated on the primary market. The total amount of placements for five months constituted 93.5 billion rubles ($3 billion), exceeding by more than six times the figures of the first five months of the previous year. This is driven by a number of factors: First, as the market yield benchmarks decrease, the buyers’ preferences shift toward more profitable and riskier bonds and second, the 1st-tier issuers had already to a large extent satisfied their needs in borrowing in 2009.

The placement volume in state bonds has already exceeded the previous year’s level. Given an anticipated budget deficit of about 5 percent and the unwillingness of the government to borrow funds abroad or spend reserve fund money, the Finance Ministry might play the  leading role in the debt market this year.

According to Trust Ruble Indices, during the first 5 months of the current year, ruble bond yields reached 6 percent to 8 percent depending on the market ­segment. The major contribution to the overall yield was gained through positive bond revaluation, which occurred due to benchmark decreases following the market yield. This explains why Russian federal bonds enjoyed a better position, since their average duration is higher than that of the corporate bonds.

In my opinion, the potential for positive revaluation of ruble bonds is currently exhausted to a large extent, and thus, when purchasing securities on the primary market, holders can no longer count on prompt revaluation, and therefore, when placing bonds the issuers will have to offer premiums for the initial placements.

Currently, the ruble bonds yield map is as follows. Russian federal bond yield is about 6 percent to 7.5 percent depending on duration. Moscow bonds give a yield premium of about 50 to 70 basis points more to the sovereign curve, while 1st-tier corporate bonds — Gazprom, LUKoil and Russian Railways — offer a yield of 30 to 50 basis points to the Moscow ones. The top-quality 2nd-tier issues, telecoms and certain metallurgical companies, grant 20 to 40 basis points more.

Yield of the other bonds is dependent on the financial figures and the quality of the issuers.

Access to debt markets is restricted for the 3rd-tier issuers. This is explained by the fact that investors are presently satisfied with the yield offered by higher-rank issuers while not yet being in a position to buy debts from high-risk companies. Market players still remember a row of defaults that occurred just recently: Namely, 128 companies once or more failed to fulfill their obligations. The total number of defaults reached 479. The situation could change as soon as the bond yield from quality issuers reaches the minimum permissible level, and investors will need to find new trading ideas for gaining higher yields and making their profitability plans come true. Taking into account stable economic growth and the fact that past unfavorable default experience tends to be easily forgotten, I expect some high-risk issuers to enter the debt market. Anyway, the investors have the floor.