"During 2011-15, the average covenant quality score for 137 full-package Asian bonds scored was stronger than that for the 47 full-package Latin American bonds, with better scores in five risk areas: restricted payments, risky investments, leverage, liens subordination and change of control," says Jake Avayou, a Moody's Vice President and Senior Covenant Officer.
"Protection against structural subordination risk is the one area of relative weakness, with Asian bonds showing the lowest average score globally of 3.92, and the reason is mainly the significant risk existent in Chinese bonds," says Avayou. "But, if we exclude Chinese bonds, the average for Asia is 2.13, stronger than all other regions".
"At the same time, both Asian and Latin American bonds provide more protection than those issued in North America, as well as Europe, the Middle East and Africa (EMEA), faring better in restricted payments, risky investments and leverage risk," adds Avayou.
Asian bonds show an average covenant quality (CQ) score of 2.55 versus 3.00 for Latin America, with a lower score denoting stronger covenant quality on our scale from 1.0 to 5.0.
Moreover, a higher percentage of Asian bonds fall in our strong and good categories (56%) than bonds from any other region. No Asian bond has ever scored in our weakest category and only 4% fall in our weak category compared to 9% and 17%, respectively, for Latin American bonds.
Adding to the weakness of Latin American bonds -- relative to Asian bonds -- is their significantly higher proportion of high-yield lite bonds, which receive an automatic CQ score of 5.00, the weakest level possible on the Moody's scale.
Also Read
From 2011 to 2015, 14 of 61 (23%) high-yield bonds issued in Latin America were high-yield lite, while, in Asia, 12 of the 149 (8%) bonds issued fell under this category.
In North America and EMEA, the focus by investors on yield has resulted in a proliferation of weak covenant structures with a considerably higher percentage of deals falling in our weak and weakest categories.
Moody's summarizes its assessment of the six key risk areas as follows:
Restricted payments (RP) protection is strong in Asia except for pre-dating. Asian bonds have fewer RP carve-outs and stronger objective checks on affiliate transactions.
Asian bonds provide stronger protection against risky investments. Asset sales covenants are stronger in Asia, but restricted investments covenants are weaker because Chinese property bonds have large carve-outs for investments in joint ventures.
Leverage scores are stronger in Asian bonds as issuers have less capacity to incur additional debt due to high fixed-charge coverage ratio (FCCR) thresholds under the $1 debt test. But more Latin American bonds require companies to satisfy two leverage ratio tests, rather than one, which is a protective feature for investors.
Asian bonds allow for less potential liens subordination. Permitted liens carve-outs are smaller in Asian bonds, averaging 0.58x adjusted EBITDA versus 1.38x in Latin America. Latin American bonds also contain higher general liens baskets than Asian bonds, and more contain a carve-out for liens securing any debt under the debt covenant if a secured leverage ratio test is satisfied.
At a regional level structural subordination risk is Asia's - and specifically China's - one weak area. By contrast, in the case of Latin American bonds, a substantial majority of group assets and/or cash flows are at the issuer level, or with subsidiaries that guarantee the bonds, thereby minimizing structural subordination risk.
Change of control protection is much stronger in Asian bonds; nearly all contain all five of the standard events that trigger the change-of-control put option versus 19% of Latin American bonds. However, 85% of Asian bonds contain a double trigger, further requiring a negative ratings action to trigger the put versus 53% of Latin American bonds.
Separately, Moody's also notes that Latin American bonds provide issuers with more flexibility for mergers. The merger covenant, which provides event-risk protection against increasing leverage, in Asian bonds provides investors with more protection than Latin American bonds.
Powered by Capital Market - Live News