In the Russian bond market, the term “default” doesn’t imply collapse or catastrophe. It has become a fairly routine, albeit unpleasant, event – borrowers failing to meet their obligations on time. Recently, defaults have mostly involved smaller companies. However, the period of high interest rates has changed the game: over the past year, the obligations of bond issuers have grown two to three times, and so has the price of risk.

Over the last two years, there have been more than 40 defaults (including technical ones) on exchange-traded bonds, totaling over 10 billion rubles and impacting more than 80,000 retail investors. Independent estimates suggest that the number of defaults could double in the next two years.

These expectations are primarily driven by the high-interest rate environment. Just last summer, the key rate stood at 7.5 – 8.5%, but a year later, it has surged to 16%, and as of late October 2024, it reached 21%. The Central Bank has not ruled out another rate hike at its December board meeting, and market participants predict it could rise to 22 – 23%. Corporate bond yields have followed suit.

According to Bonds Labs, yields on bonds issued by top-rated companies (such as Sberbank, Russian Railways, MTS, RusHydro, etc.) now range from 19% to 22% annually. Issuers with high credit ratings (e.g., RSHB, Rostelecom, EuroChem) are offering yields of 22–25% per year. For lower-quality bonds, yields have climbed to 30–33% annually.

Servicing debt has effectively become two to three times more expensive for issuers compared to a year ago. And this high-rate period might persist. While analysts expect the key rate to decline in 2025, the drop is likely to be modest – to around 18 – 19%. The Central Bank’s forecast for the average rate next year is 17 – 20%.

These conditions make rising concerns about issuers’ ability to meet their obligations entirely reasonable. This is especially true for issuers of so-called high-yield bonds, which carry elevated investment risks.

“Clearly, in an environment of extremely high rates that will remain until at least mid-to-late 2025, servicing and refinancing debt will be exceptionally challenging for such companies, potentially leading to a surge in defaults in the public debt market,” analysts warn.

The next peaks in corporate bond repayments in Russia are expected in Q4 2024, as well as in February and April 2025. If high rates persist, “the resilience of companies to interest rate pressures may be severely depleted.”