What to do if the bonds are defaulted on. Analysis

The material is not an investment recommendation

The number of bond defaults in the first six months of 2025 exceeded the same figure for the entire previous year. The reasons for the defaults of companies are the prolonged effect of a high key interest rate and an increase in the debt burden on companies. How to identify the signs of impending default and what an investor should do if it occurs is in the Izvestia article.

What is a default?

• Default is the inability of a company to pay interest to bondholders. In fact, a bond is a promissory note: the issuer (the company that issued the bonds) borrows money from the investor and undertakes to pay interest annually for their use. If this payment is missed for at least one day or the company is unable to publish its financial statements on time, a technical default occurs.

• A technical default does not necessarily lead to bankruptcy: the company may have funds, but it cannot fulfill its obligations to investors on time. After the announcement of a technical default, the issuer's credit rating is lowered and it receives the status of "under supervision". The company has two weeks to resolve the situation. But technical default itself already carries risks for the company: lowering the credit rating complicates the placement of securities and raising funds.

• If the company does not manage to fix the situation in 10 working days, its rating is lowered to default: it is indicated by the letter D. Now the issuer has only two ways — to negotiate debt restructuring with its creditors or to go through bankruptcy proceedings.

What should an investor do in case of default

• If the company fails to restructure the debt, the investor can either get rid of the defaulted bonds or go to court to receive compensation as a result of the bankruptcy procedure. But both options come with risks.

• Defaulted bonds can be sold if there is a buyer for them, and this should be done as soon as possible before they completely depreciate. However, there are cases when it may be beneficial to keep securities. Qiwi Finance, whose bonds fell in value by 50-60% of face value after the default, bought out almost the entire issue of 001P-02 bonds a few months later, and those who purchased defaulted bonds turned out to be in the black.

• Going to court also gives hope for saving at least some of the money invested in securities. But it should be borne in mind that bondholders are creditors of the third stage, that is, they can expect payments only when the company pays off its main obligations — tax and utility bills, salaries and remuneration of the bankruptcy trustee.

• In case of bankruptcy of the company, holders of fixed coupon bonds (with an approved interest rate) will receive compensation based on this fixed yield. Holders of key rate-linked bonds (floaters) should be prepared for the fact that in the event of a reduction in the key rate from the moment of default, their payments may also decrease.

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How investors' rights are protected

• To protect the rights of investors, there is a representative of the bondholders (PVO) — it can be a broker, a bank, a management company of a mutual or joint-stock investment fund or a non-governmental pension fund. The PVO monitors the fulfillment by the issuer of its obligations to bondholders and warns of a situation when investors have the right to demand early repayment of payment obligations. PVO submits claims to the issuer on behalf of the bondholders in the event of its bankruptcy.

• Investments are always a risk, so the bondholder must monitor their investments, assess the financial condition of the company, and monitor the news and financial statements that the issuer makes publicly available. If the company's credit rating is downgraded or there is information that the issuer is experiencing difficulties, it is necessary to get rid of the asset as soon as possible, without waiting for default.

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• It is better for novice investors to invest in bonds of companies with state participation, which are least susceptible to default, and choose those issuers with a rating from AAA to A on a national scale. According to the Expert RA agency, companies with A rating of A- and above had no defaults. But the profitability of such securities is lower than that of riskier bonds.

• Bonds with a speculative or "junk" rating of C or lower bring higher returns, but also carry much more serious risks for the investor. Therefore, when forming a portfolio, experienced investors prefer more reliable bonds.

Signs of a company default

• One of the most obvious signs of an approaching default is the downgrade of the issuer's credit rating. The agencies that make up such ratings analyze the issuer's accounting data and changes in the company's status. The information can be tracked according to the data of the rating agencies of the Bank of Russia: Expert RA Rating Agency, Analytical Credit Rating Agency (ACRA), National Rating Agency (NRA) and National Credit Ratings (NCR).

• Risks on the company's bonds can usually be detected 3-6 months before default according to the reports of analysts of the rating agency, the increase in the debt burden on the issuer and discrepancies in its financial statements. A decrease in demand for the company's products or sanctions pressure also play a role. Currently, category B issuers have the greatest risk of defaults. Companies that are under sanctions and have a high debt burden are at the greatest risk, and analysts believe that the peak of defaults has not yet passed.

During the preparation of the material, Izvestia interviewed:

• Andrey Barkhota, an economist and financial market expert;
• Alexey Rodin was an economist and financial expert.