Asian Bonds’ Covenant Quality Strengthens in Q2, Says Moody's

Covenant packages for Asian high-yield bond deals issued in the second quarter of 2014 were stronger than compared to the first quarter of 2014 and remain more protective than those of similarly rated US, Latin American and European bonds, says Moody's Investors Service.

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.

The relative strength of Asian covenants is driven by stronger levels of protection in five of the six key risk areas Moody's identifies in its covenant scoring analysis.

The areas are cash leakage, investments in risky assets, leveraging, liens subordination, structural subordination, and event risk or change of control.

"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," says Jake Avayou, a Moody's Vice President and Senior Covenant Analyst.

In a report, Moody's 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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