"Currently, for the vast majority of Asian high-yield bonds, the company only needs to provide the trustee with financial reports after they are filed with the relevant stock exchange. Therefore, if a company fails to file such reports with the relevant exchange, there is no breach under the indenture," says Jake Avayou, a Moody's Vice President and Senior Covenant Officer.
"By comparison, in the US, as a result of litigation, high-yield bond covenants expressly tie the delivery of financial reports to the filing deadlines of securities exchanges, while Asian covenants have not done the same and maintain ambiguous language that is not protective for bondholders," says Avayou.
Moreover, around half of Asian high-yield bonds which require a company's external auditors to provide the trustee with a verification of its fixed-charge coverage or leverage ratio include an exception if the auditor's policies prevent the issuing of such a certificate.
"But Moody's notes that it would be difficult for bondholders to determine whether a particular external auditor's policy would prevent this under the circumstances and whether a company used reasonable efforts to obtain such a certificate," adds Avayou.
Under the "after required filing" version, a publicly listed company that failed to file its financials with the relevant regulatory body within the latter's deadlines would be in breach of the financial reporting covenant contained in its bond indenture.
Currently, in Asia, if a company fails to meet its reporting obligations -- pursuant to relevant stock exchange rules -- and its bond indenture uses the "after filing" version, then there would be no breach of the financial reporting covenant because, under a plain reading of the covenant, the company only needs to provide the trustee with financial reports within 10 days after they are filed with the relevant stock exchange.
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