Short-sellers delve deep into their targeted securities' markets

Short-sellers delve deep into their targeted securities' markets

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April saw the domestic bond market thrive, with a staggering 930 billion rubles worth of bond placements, a figure barely dipping from the previous month. Companies were the chief contributors, holding 185 placements amounting to 927.2 billion rubles. Short-term bonds were the preferred choice, while exporters opted for currency and discount bonds, although these remain somewhat unconventional. Market players are optimistic that more issuers might embrace these less-common bonds, as they can significantly lower debt servicing costs.

Corporate borrowers remained active throughout April, according to data from Cbonds. Despite a minor 11% decrease compared to March, the volume was impressively high compared to previous April records. Albeit excluding placements that span from 2022 to early 2024, the result marked a new April high, surpassing the previous 2023 record by a significant margin.

Issuers have largely abandoned the wait-and-see strategy for the "most favorable market window." Instead, they are proactively adapting to the market conditions, investor preferences, and their own needs. Particularly popular are short-term bonds.

Eduard Dzhabarov, head of capital markets management at Sberbank, reported an average maturity of 2 years and 3 months for 2025 placements, contrasting the 3 years and 3 months observed in 2024. Companies are actively placing issues with maturities of 2 to 2.5 years at fixed rates, offering enticing coupon rates of 18% per annum for high-quality issuers, significantly lower than the current key rate (KR, 21%).

Large companies also issued floating rate notes (FRNs), with a total of 17 such deals in April amounting to over 530 billion rubles. This represents a 15% increase from March and a staggering 13 times the value of February, largely driven by significant deals from GMK "Norilsk Nickel," VEB.RF, "Aeroflot," "Magnit," and "Yandex."

To further minimize interest expenses, companies continue to issue foreign currency bonds. In April, issuers closed six deals with a combined value over $1.5 billion, besides a CNY 11.2 billion bond offering by "Rusal," one of the largest Chinese currency deals on the Russian market. Robert Smakaev notes that these bonds are preferred by exporters due to their low absolute yields. All dollar bond issues in April carried yields of 6.7-13.7% per annum, while similar quality ruble bonds yielded 17.3-19.25% per annum.

The tight DCP environment has not deterred companies from issuing discount bonds, as evidenced by "Gazprom Neft's" successful offering of a discount bond featuring a 2.5% annual coupon and significantly surpassing the issue volume. Artem Starikov, Alfa Bank's head of debt capital management, explains that issuing discount bonds allows issuers to reduce coupon payments throughout the bond's life but requires full payment of the discount to investors at maturity. Eduard Dzhabarov adds that this instrument benefits investors by safeguarding against a decrease in reinvestment income compared to classic bonds.

While market players anticipate continued issuance of foreign currency and discount bonds in the current environment, several experts believe that some issuers might launch discount issues, albeit requiring adjustments to the emission documents. Additionally, Artem Starikov expects an increase in the volume of issues with a fixed rate for a term of around two years. Meanwhile, Eduard Dzhabarov does not exclude the possibility of the start of the key rate reduction cycle and the further decline in OFZ yields leading to an increase in the average maturity of the offered bonds.

The trends and factors shaping the issuance of short-term bonds, currency bonds, discount bonds, and foreign currency bonds in the Russian domestic bond market are shaped by numerous key components:

Trends

1. Monetary Policy Effect: The high key interest rate of 21%, maintained by the Bank of Russia, creates a challenging environment for bond issuances. Tight monetary conditions discourage borrowing and can restrict demand for bonds, particularly those with shorter maturities or lower yields.
2. Economic Pressures: The ongoing economic pressures, such as high inflation and strong demand overshadowing supply, impact the bond market. cooling inflation may lead to rate cuts later in 2025 and 2026, potentially improving bond issuance conditions.
3. Market Access: Russian banks' exclusion from international finance affects the domestic bond market by reducing access to foreign capital and potentially impacting the issuance of foreign currency bonds.

Factors

1. Interest Rates: High interest rates make borrowing expensive, discouraging issuances of short-term bonds and currency bonds. As interest rates are expected to decrease modestly, this could stimulate issuance.
2. Inflation and Economic Growth: High inflation and strong economic growth create increased demand for bonds as investors seek higher returns. However, this growth also raises borrowing costs, impacting discount bond issuance.
3. Regulatory Environment: Changes in governmental policies, such as the termination of mortgage subsidy programs, can have a broader impact on the bond market by affecting liquidity and investor confidence.
4. Foreign Currency Dynamics: The strength of the ruble and potential changes in foreign economic relations can influence the issuance of foreign currency bonds, as investors may seek safer or more stable currencies.

Expected Developments

• Rate Cuts: Anticipated rate cuts in the second half of 2025 and 2026 could improve conditions for bond issuance by reducing borrowing costs.
• Market Evolution: The Russian bond market is expected to evolve as economic conditions stabilize and interest rates fall, potentially leading to increased issuance activity.

Overall, the Russian bond market is influenced by a combination of monetary policy, economic conditions, and regulatory changes, with anticipated developments in interest rates and economic stability likely shaping future trends.

• In the ever-evolving Russian domestic bond market, the proactive approach of issuers toward market conditions, investor preferences, and their own needs has led to an increased issuance of less-common bonds such as currency and discount bonds.
• The trend of large companies issuing foreign currency bonds persists, with favorable yields and access to foreign capital making it a popular choice for exporters in the finance industry, contributing to the business sector's growth.

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