Weaker covenant packages are underscored by an environment where high-yield offerings out of Asia hit a record of $55.8 billion in 2017 as a result of strong investor demand. Bond buyers with ample cash are turning from investment grade credits whose overbought spreads are the tightest in more than a decade, to lower-rated and lower quality names. The strong demand for bonds is giving some of the weakest borrowers in the region access to financing, with some of last year’s postponed deals finally being priced successfully.
In the chase for higher yielding fixed income assets, investors in Asian bonds have neglected to ensure that the junk bonds they purchase have sufficient protection, as reported by Moody’s Investor Service. The international credit ratings agency analysed 10 high-yield bonds issued in 4Q2017 with a total offering size of $3.34 billion, showing that covenant strength, or the safeguards as presented in the fine print of bond prospectuses, have fallen to the lowest level since Moody’s started scoring covenant packages in 2011. 22% of Asian bonds scored in the weak category for covenants at the end of 2017, as compared to 5% in 2011, whereas strong-to-good protections dropped to 31% from 82%. As such, Asian issuers have gained more flexibility to move assets out of reach of bondholders through restricted payments, to increase investments in risky assets, or to incur additional debt.