Moody's: Covenant quality score for Asian high-yield bonds falls to weakest level on record

Moody's Investors Service says that the average covenant quality (CQ) score for the Asian high-yield bonds that it scored in Q4 2017 was at 3.06, a result which was considerably weaker than the 2.72 registered in the previous quarter (Q3 2017).

"The CQ score for Q4 2017 was the weakest for any quarter with more than one bond issued since we began scoring in 2011," says Jake Avayou, a Moody's Vice President and Senior Covenant Officer.

"And, for Q4 2017, protection in four of the six risk areas weakened," adds Avayou.

For the year, covenant protection for Asian bonds weakened in 2017 from 2011, with only 31% of bonds falling in the strong and good categories in 2017 compared to 82% in 2011, while 22% of bonds fell into the weak category compared to only 5% in 2011. No full package Asian bond has ever scored in the weakest category.

Nevertheless, the Q4 2017 score takes the Asian region's overall average to 2.65 for January 2011 through December 2017, which is much stronger than the global average and the averages for the Americas and EMEA (Europe, the Middle-East and Africa).

Moody's scored 10 high-yield bonds that cleared the market in Q4 2017, all of which were full-package. Scores for four risk areas: cash leakage, investments in risky assets, leveraging and liens weakened from those in Q3 2017.

Leveraging and liens scores weakened the most because all but two bonds included credit facility carve-outs that were permitted to be secured by the relevant company's assets without equally and ratably securing the bonds. Moody's views credit facility carve-outs without being tied to a specific purpose such as capital expenditures for example as a weakness.

The other two risk areas are structural subordination and change of control; scores for which improved quarter-on-quarter.

Press Metal Aluminium Holdings Berhad's (Ba3 stable) bond scored 2.54 for Q4 2017, the strongest CQ score of the quarter. However, that result was considerably weaker than the strongest CQ score in the third quarter, for Geo Energy Resources Limited's (B2 stable) bond, which scored 1.49.

WTT Investment Ltd's (B1 stable) bond scored 3.78 for Q4 2017, the weakest bond of the quarter and the second weakest sponsor deal since Moody's began scoring in 2011.

For Q4 2017, Moody's scored only two bonds for Chinese property developers: Times Property Holdings Limited (B1 positive) and Yango Group Co., Ltd (B2 stable), which garnered an average CQ score of 3.06, a result which was stronger than the third quarter average of 3.37. The average score for Chinese developers from January 2011 through the fourth quarter of 2017 was 2.89 (moderate) compared to the CQ average of 2.30 (good) for Asia bonds excluding China property bonds for the same period.

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