Moody's: Asian covenant quality stable over two consecutive quarters

Moody's Investors Service says that the strength of Asian high-yield-bond covenants was unchanged in the second quarter of 2015 (Q2) from the first quarter of the same year.

"The 2.63 average covenant quality score for Asian high-yield bonds issued in the second quarter of 2015 is unchanged from the first quarter, indicating continued upper-tier moderate investor protections," says Jake Avayou, a Moody's Vice President and Senior Covenant Officer.

"While the 2.63 score in the second quarter of 2015 is slightly weaker than the region's cumulative average score of 2.52 for January 2011 to June 2015, thereby indicating a slight weakening of investor protections, Asian covenant packages are much stronger when compared with the global cumulative average of 3.38," adds Avayou.

However, Avayou points out that the covenant quality of Chinese property developers has continued to weaken.

On Chinese property transactions in particular, Moody's report points out that the average covenant quality score for the six Chinese property deals in Q2 was at 2.94; a score in the moderate category. Such a result was weaker than the average of 2.69 (in the upper-tier moderate category) for Chinese property transactions from January 2011 through March 2015; owing to looser protections in the restricted payments and investments in risky assets areas.

Moody's report further points out that the Chinese property transactions in Q2 pre-dated their restricted payments income baskets before the issue date of their bonds, without disclosing in the offering memorandum the amount of credit in the basket.

A total of nine full-package deals closed in the second quarter. Such deals exhibit at a minimum, both a restricted payments covenant and a debt incurrence covenant.

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

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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