Focus on corporate bonds – Russian managers act before market liberalisation

Russian corporate bonds may not be at the top of allocators’ thought processes, but proposed law changes and market liberalisation making the asset class more accessible could soon bring them closer to the top.

There is evidence some early movers are already acting.

For example, Renaissance Asset Managers’ Luxembourg-domiciled Russian debt fund has increased its position in corporates, in anticipation of upcoming reform.

One manager said Russian banks and brokers can be seen increasing their positions, too.

Elena Kolchina, head of fixed income group at Russia’s Renaissance Asset Managers, said: “Spreads have already started compressing, so there is more demand for corporate bonds on the market, but they could easily move another 100 basis points in the next six months.”

Earlier this year, Moscow simplified access to the country’s government debt by adding Euroclear and Clearstream to the list of clearing houses allowed to trade Russia’s government bonds.

The same plans have been slated for corporate bonds and, though the timing is as yet unclear, some market practitioners say the law could come into force as early as November.

Recently, Russia’s Eurobonds have shown some of the best performance in the emerging markets universe, and corporate bonds show a similar picture.
Kolchina points to the opportunities for a higher yield pick-up from Russia’s corporate bonds. The premium, she says, can be up to 200 basis points compared to local government debt.

Both asset classes are offering positive real yields, comfortably outstripping inflation in the country, which was 6.3% early this month. The average yield on five-year government debt is around 7.5%, while corporates are yielding 9% and above.

Investors are still reluctant to pile into the asset class, however. Average ratings are BB-, putting Russia’s bonds in the riskier high yield category.
It is political uncertainty and market volatility that are causing allocators to remain cautious in their investment strategies, so Kolchina expects the initial demand to tilt towards government debt, where most managers and investors are more comfortable.

But Russian companies have strong credit metrics, low debt levels and little leverage, she points out, making them a relatively safe investment option.
Around 80% of the corporate bond universe in Russia is comprised of banks, which are a low volatility asset.

They have high levels of liquidity compared to Europe’s struggling banks, and follow conservative strategies, preferring to buy and hold assets for long periods.

This makes Russia’s corporate bond universe attractive as a means of picking up some extra yield without dramatically increasing the risk exposure of the portfolio.

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