Global Credit Research
Moody's Investors Service says that Indian high-yield-bond covenants offer stronger protection for investors than the average bond issued in other Asian countries and globally."The Indian deals have strong protection against value leakage, limited ability to make risky investments and effective limits on debt incurrence," says Jake Avayou, a Moody's Vice President and Senior Covenant Officer.
"The bonds also contain few permitted liens carve-outs, which further limits the amount of secured debt these companies can incur," adds Avayou.
Moody's conclusions are contained in its just-released report "High-Yield-Bond Covenants - Asia: Indian High- Yield-Bond Covenants Provide Strong Protection". The report looks at the four full-package Indian deals that have closed since Moody's began scoring covenants in January 2011. Specifically, the average overall covenant quality (CQ) score of 1.97 for the four Indian high-yield-bond deals is stronger than the Asian average of 2.49 and the global average of 3.37.
Moody's measures bond covenant quality on a five-point scale, with 1.0 denoting the strongest investor protections and 5.0 the weakest, and assesses bond protections against six risk areas: restricted payments, investments in risky assets, leverage, liens subordination, structural subordination and event risk (change of control).
This relative strength of the Indian bonds reflects their stronger average scores in four of the six sub-components that drive 70% of the overall CQ score, namely restricted payments, investments in risky assets, leverage and structural subordination.
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Moody's report notes that structural subordination risk is lower than in Chinese deals, but higher than in Indonesian ones. Indian regulations are not as restrictive as Chinese regulations in limiting onshore subsidiaries' ability to guarantee bonds.
Nevertheless, a significant amount of assets in some of the Indian deals are held by non-guarantor subsidiaries, increasing the risk that bondholders will be pushed lower in the capital structure in the event of a liquidation.
But change of control put scores are an area of weakness in the Indian deals compared to Asian peers, says Moody's. Only two of the four Indian deals include all five standard events for the change of control put to be triggered.
However, unlike the vast majority of Chinese deals, only two of the four Indian deals require a ratings decline condition to be satisfied for the change of control put to be triggered, making it easier for the put to be triggered.
The four full-package Indian deals are for Indiabulls Real Estate ($175 million, 10.25% senior notes due 2019), Delhi International Airport ($288.75 million, 6.125% senior secured notes due 2022), Lodha Developers ($200 million, 12% senior notes due 2020) and Reliance Communications ($300 million, 6.5% senior secured notes due 2020).
The four deals closed in the fourth quarter of 2014 and the first and second quarters of this year.
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