Asian High-Yield-Bond Covenant Quality Strengthens Further in Third Quarter

Covenant packages for Asian high-yield bonds issued in the third quarter are stronger than those issued in the second quarter and remain stronger than those of similarly rated US, Latin American and European bonds, according to Moody's Investors Service.

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

According to Moody's, the one weak point continues to be structural subordination.

"Owing to regulatory constraints on capital outflows, onshore Chinese subsidiaries do not provide guarantees or other security for debt issued by offshore entities unless the proceeds are used offshore, which has not been the case for any of the deals we scored this quarter," adds Avayou.

According to Moody's, average covenant quality (CQ) scores for rated Asian high-yield-bond deals issued in the third quarter of this year strengthened to 2.37 from 2.67 for deals issued in the second quarter and 2.82 for those issued in the first quarter.

Moody's CQ scoring system is based on a five-point scale in with 1.0 denotes the strongest level of investor protections and 5.0, the weakest.

The improvement comes as Asian covenant quality, based on cumulative average CQ scores, has declined modestly during the past three years.

The CQ score measures the level of protection a high-yield-bond covenant package, as a whole, provides to investors, using objective pre-defined criteria.

The CQ score is a weighted average of component scores that gauge the level of protection in six key risk areas: cash leakage, investments in risky assets, leveraging, liens subordination, structural subordination and event risk (change of control).

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