Analysts have predicted a doubling of the volume of replacement bonds in the market

If the norm on the mandatory replacement of Eurobonds is adopted, the volume of such currency securities on the Russian market could double, ACRA estimated. On the one hand, this can put pressure on prices,

The total volume of the market for corporate replacement bonds denominated in foreign currency may grow to $25-30 billion, follows from a review by the ACRA rating agency received by RBC. Now such bonds in the amount of $14.4 billion are circulating on it. Of the total volume of already available securities, more than $6 billion (nine issues) were placed in the first quarter of 2023, which became “one of the main drivers of the growth of the debt market.” The main issuers of replacement bonds, as in 2022, were companies from the oil and gas sector, primarily Gazprom and LUKOIL.

The range of currency instruments, including bonds, on the Russian market has been significantly reduced due to sanctions and retaliatory restrictions of the Central Bank on the purchase of foreign securities. One of the alternatives was replacement bonds - issuers issue them instead of Eurobonds, which they cannot pay due to the blocking of payments due to EU sanctions against the National Settlement Depository. The bonds are issued in foreign currency, their parameters (face value, maturity, payment schedule) are similar to the original Eurobonds, but the payments themselves are made in rubles.

“Against the background of the popularity of this instrument among investors, replacement bonds, when placed, may take over part of the free liquidity of the secondary market. Thus, in December 2022, the volume of trading in them exceeded 30 billion rubles, amounting to 6.5% of the total volume of the secondary bond market,” the study notes.

The $25-30 billion forecast was formed taking into account a possible rule on the mandatory issue of replacement bonds by issuers who previously placed Eurobonds, an ACRA representative specified in a commentary to RBC. Such an initiative was made last year by the Bondholders Association (ABO) and the HEAD of VTB, Andrey Kostin. The Ministry of Finance and the Bank of RUSSIA supported the mandatory replacement of securities issued abroad. “We believe that it is necessary to move from recommendations to rules and that, as a rule, it should be an obligation to issue replacement bonds,” said Elvira Nabiullina, chairman of the Central Bank.

What are the consequences of a multiple increase in replacement bonds

The scale of issuance of replacement bonds may be even larger than ACRA predicts. Alexander Afonin, head of the bond market analysis at Sinara investment bank, estimates the potential volume of additional replacement at $30 billion, Alexander Berkunov, a member of the board of AVO, at $25 billion, they told RBC. Based on ACRA's estimate, $10-15 billion of new securities may enter the market.

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“Taking into account the average replacement share for transactions that have already taken place, as well as the fact that Gazprom has begun additional placement of a part of previously replaced issues, the total volume of growth in the market for replacement bonds could reach $20-30 billion,” estimates the head of the analysis department for instruments with a fixed profitability of Gazprombank Andrey Kulakov.

An increase in the volume of replacement bonds may lead to price movements in the market, but it will not last long, experts say. “Since the replacement will be spread over time, we do not expect a critical overhang in supply, but there will definitely be some downward impact on quotes. On the other hand, these are new opportunities for investors,” says Berkunov. In his opinion, replacement bonds have almost no effect on the ruble market, but put pressure on yuan bonds, the yields of which are significantly lower. Therefore, issuers planning to borrow in yuan need to take this fact into account, the expert draws attention. According to the Moscow Exchange, bonds in yuan yield up to 4.9%, and replacement bonds - up to 9.5%.

The replacement bonds will help bring liquidity to both the primary and secondary markets, Kulakov said. “According to our estimates, the volume of payments, including coupons, on replacement bonds and Eurobonds held by local investors in 2023 will amount to 900 billion rubles, in 2024 - 700 billion rubles. With a high degree of probability, this money will be reinvested in the primary and / or secondary market and thus become a source of additional demand,” the expert believes.

But at the same time, replacement bonds can divert demand from traditional ruble instruments, admits an expert from Gazprombank, because local investors see them as an attractive opportunity to take currency risk in infrastructure-safe instruments. “On the other hand, some investors who previously held Eurobonds may want to reduce these taken positions after the replacement is completed, which, on the contrary, will free up some liquidity,” the expert argues.

“Recently, we have seen that placements of Gazprom's replacement bonds put pressure on already circulating securities, which leads to a decrease in quotations and, accordingly, an increase in the yields of these securities. <...> If now the market size is about $15 billion and new issues put pressure on it, then the appearance of securities on it for another $20–30 billion will have a rather noticeable negative impact,” Afonin disagrees. But, most likely, this will be a temporary phenomenon, and gradually prices will return to their fair levels, he adds.

What else happened in the debt market

In the first quarter of 2023, bond issuers are generally placed more actively than in the same reporting period last year. According to ACRA, new issues worth 900 billion rubles appeared on the market, more than 500 billion rubles. of which were placed by non-financial organizations. “This indicates the continued increased interest of issuers in placements within the “window” that opened in the fourth quarter of 2022,” ACRA explains.

Since the beginning of 2023, the Ministry of Finance has fulfilled the quarterly plan to raise funds through OFZ by 78%. “In February 2023, there was a slowdown in the dynamics of budget expenditures relative to January, with a simultaneous slight increase in oil and gas revenues,” experts noted. In the future, they expect the ministry to increase its borrowing plan against the backdrop of rising budget spending (for the first two months, the deficit amounted to 88% of the annual plan) and the plans of the Bank of Russia to revise the neutral value of the key rate (from 2020 it is 5–6%). By mid-March, no defaults by new issuers were recorded on the Russian bond market. But risks still remain for companies in the sector of high-yield bonds (offering a yield of 5% or more to the key rate of the Central Bank), analysts say. “ACRA does not predict massive defaults in the coming months in the absence of new “black swans” on the market,” the review says. The agency does not provide an annual default forecast. Previously, Expert RA analysts predicted up to 25 new defaults in the coming year. Yields on bonds of the first tier increased due to the growth of OFZ yields, while in the third tier (high-yield bonds), on the contrary, they fell to 15% or lower and the situation in general became less volatile, analysts say. “Spreads between yields of bonds in the secondary market have returned to the state observed in mid-2021: about 80 basis points between the first and second tier and about 200 basis points between the second and third,” the data is given in the review. Peak spreads between tiers were observed in March 2022: between the first and second tiers they reached 530 bp, and between the second and third tier they reached 1300 bp. Due to the decrease in the difference in rates, ACRA expects placements in the third tier to become more active.