Covenant packages for Asian high-yield bond deals strengthen in Q2: Moody's

Moody's says the quarter-on-quarter change reflects in part the composition of deals that came to the market; with 12 closing in 2Q2104

July 15, 2014 10:09 IST | India Infoline News Service
Moody's Investors Service says that covenant packages for Asian high-yield bond deals issued in 2Q2014 were stronger than compared to 1Q2014 and remain more protective than those of similarly rated US, Latin American and European bonds.

"The average score for Asian deals was 2.48 for the period between 2011 and 30 June 2014, as against the global average of 3.33 on Moody's five-point scale, in which 1.0 denotes the strongest level of investor protections and 5.0, the weakest," says Laura Acres, a Moody's Associate Managing Director.

"The relative strength of Asian covenants is driven by stronger levels of protection in five of the six key risk areas we identify in our covenant scoring analysis, namely: cash leakage, investments in risky assets, leveraging, liens subordination, structural subordination, and event risk or change of control," adds Jake Avayou, a Moody's Vice President and Senior Covenant Analyst.

Acres and Avayou were speaking on the release of Moody's quarterly report on the covenant quality trends of bonds in Asia Pacific, "Asian Bonds' Covenant Quality Strengthens in Q2". The report covers all Moody's-rated high-yield bond deals in the region, launched since 2011, and compares them with transactions in other regions as well as globally.

"The one weak point is structural subordination, owing to regulatory constraints related to capital outflows, because onshore Chinese subsidiaries do not provide guarantees or other security for the debt of offshore entities, unless the notes proceeds are used offshore," adds Avayou.

Moody's further points out that while the covenant quality of Asian deals has declined modestly since early 2011, the average covenant scores for the region's high-yield bonds strengthened to 2.67 in 2Q2014 from 2.82 in 1Q2014.

Moody's says the quarter-on-quarter change reflects in part the composition of deals that came to the market; with 12 closing in 2Q2104, of which four were for non-Chinese issuers.

By contrast, 15 of the 16 deals scored in 1Q2014 were for China-based corporates. Non-Chinese deals tend to have stronger scores, averaging 2.1 for 2Q2014 versus 2.99 for Chinese deals in the same period.

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