High Yield Bond Market Exceeds Record Year 2021

In the first half of the year, the high-yield bond (HDO) market noticeably revived, exceeding the record year 2021 in terms of volume. Experts attribute the situation to the adjustment of the borrowing policy, fundamental restrictions on the capital markets and the growth of interest rates on credit lines. On the horizon of three to six months, industry involvement in the issuance of VDO will grow, analysts expect.

As follows from the review of Ivolga Capital (available to Kommersant), the volume of placed VDOs for the first half of the year amounted to 25.6 billion rubles. “In fact, at the end of the first half of the year, the market volume exceeded the “record” year 2021 with an almost monthly increase in placement volumes,” the document says. More than half of the placed volume of bonds falls on BBB rating category papers, about a third on BB and only 13% on B and unrated papers.

The increase in activity of issuers in the segment is due to the adjustment of the borrowing policy, when, against the background of the expectation of an increase in interest rates in the economy, it is profitable for companies to enter the debt market to achieve the goals of their financial strategy, says independent financial analyst Andrei Barkhota. The demand for VDO has also increased, taking into account the need to utilize resources that were previously invested, including through those channels that became the object of sanctions restrictions, he specified. “Investment demand for such instruments is dictated, among other things, by the narrowing of the gap between the credit quality of I and II tier issuers,” adds Anna Avakimyan, Chief Analyst at RegBlok.

The VDO market is growing at an increasing pace, even more intensively than in the successful 2021, says investment strategist at Arikacapital Sergey Suverov. Developers, microfinance organizations and the leasing industry still remain the largest industries, he notes.

Taking into account the increased current rates in the economy, when long OFZs are traded at more than 11% per annum, the yields on VDO are far ahead of bank deposits, says Evgeny Vorobyov, head of the credit analysis department of Ingosstrakh-Investments Management Company.

In VDO, there is traditionally a high share of participation of individuals who are attracted by high profitability, he believes.

Obviously, issuers understood that the market was expecting a change in monetary policy and an increase in rates, so everyone was in a hurry to take advantage of the window of opportunity, says Maxim Chernega, head of the DCM department of the corporate finance department at Tsifra Broker. “The bond market has always been more expensive than the bank lending market, and the rate differential doesn’t really affect what happens in the market,” he explains. “Issuers will borrow at any rate if they need to.”

On the horizon of three to six months, industry involvement in the issuance of VDO will grow, which will meet the interests of issuers, Mr. Barkhota believes. “The willingness of VDO issuers to place at higher rates (+1.5–3 p.p.) will be determined by the situation in the debt and credit markets, as well as by the macroeconomic environment,” the expert believes. “Treasury divisions of issuers pay close attention to inflation and exchange rate. In the event of an accelerated devaluation of the ruble and a partial loss of control over its purchasing power, an increase in interest yield on new issues of VDO is inevitable.”

But the largest number of defaults falls on the VDO segment, Mr. Vorobyov emphasizes.

The risks of default on GDOs in the segment of first-class issuers are seen as comparable to classic debt issues, Ms. Avakimyan believes. In the second tier of issuers, such risks may be higher, she stressed. The historical share of defaults over a three-year horizon is 8.03% for the BBB rating, 13.97% for BB, and 20.31% for B, says Mr. Suverov.

For two years now, rating agencies have been talking about the possibility of cascading risks in the VDO sector, that the sector will collapse, etc., says Mr. Chernega, but there are still only isolated cases of defaults on the market: “Yes, some default stories are possible in separate names, but in cascade they are only possible if we have a sharp political shift or increased sanctions, that is, a global negative.”

Ksenia Kulikova