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High-yield bonds in Russia

Category — CIS Bond Market
Bonds with a credit rating of below investment-grade (below BBB- by S&P and Fitch or Baa3 by Moody’s) are viewed as high-yield bonds worldwide (see the term "High-Yield Bonds"). In Russia, given that the sovereign rating is teetering on the edge of the speculative level and most issuers positioning themselves as high-yield ones do not have a rating, other criteria are usually used to define "high-yield bonds".

The concept of "high-yield bonds" is not defined in Russian law. For internal calculations, Cbonds classifies as high-yield bonds the issues that meet the following criteria:
• The coupon rate at the rate fixing date is equal to or more than the "Bank of Russia key rate + 5% p.a.";
• The issue amount is not more than RUB 2 billion;
• Maturity is at least 360 days.

After a number of defaults and withdrawal from the market of small issuers in 2008-2009 and up to 2016, the "fallen angels" (Mechel, Finance-Avia (UTair), FESCO) and some third echelon issuers (First Collection Bureau, Home Money) were those, who showed meaningful return on investments on the Russian market. A new stage of market development began in November 2016 with the placement of the debut issue of commercial bonds Lombard Master, KO-P01 at the rate of 33% per annum.

In 2018, the segment regained its momentum with the entry of new SMEs into the Russian bond market, borrowing small amounts for short periods with a high coupon rate and no credit rating. The growing number of liquid securities made it possible to start calculating the market segment’s index; criteria for recognizing a high-yield issue were set and the first Russian high-yield bond index (Cbonds-CBI RU High Yield) was launched.

High-yield bonds are placed in a form of exchange or commercial bonds. The underwriters are generally small investment companies engaged in this type of business (the list of the underwriters of high-yield bonds is available in the "Underwriter Rankings" section).

In the first years, many bonds were placed without ratings of rating agencies, thus blocking access to the segment for most institutional investors. One of the first issuers to receivea rating and to position itself as a high-yield issuer was Legenda, a St. Petersburg developer (Legenda, 001P-01). In 2020, an increasing number of issuers began receiving ratings of the Russian rating agencies.

In 2019, the government launched support measures for the high-yield bond segment. The mechanisms of government support include:
• Suretyship / Guarantee of the SME Corporation on the nominal value and coupon;
• Participation of SME Bank in the placement as an anchor investor / joint underwriter;
• Subsidization of the coupon rate (70% of the coupon rate, but not more than 2/3 of the Bank of Russia key rate) / listing costs (2% of the issue amount, but not more than RUB 1.5 million) by the Ministry of Economic Development of the Russian Federation.

The first issues placed with the assistance of SME Bank and the Ministry of Economic Development were the issue of GC TALAN developer (Talan-Finance, 001P-01) and Bright Fit fitness club network (Bright Finance, BO-P01).
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