Asian high-yield bond covenants weakened in Q1 2017, as the average covenant quality score for bonds issued by Chinese property developers fell further. However, the average score for Asia remained much stronger than the average scores for other regions.

The data is noted in a recent Moody’s report, QI Covenant Quality Weakens, Driven by China Property Bonds. The report assigns bonds a covenant quality score of 5.0 to 1.0, with 5.0 being a weak score, and 1.0 denoting a strong covenant quality.

The report notes covenant protection in Asian bonds has been steadily weakening since 2011, with only 28% of bonds falling in the strong (1.0 to 1.8) and good (1.8 to 2.6) categories in Q1 2017 compared to 82% in 2011.

“The average covenant quality score for rated Asian high-yield bonds issued in Q1 2017 is 2.86, weaker than the 2.60 in Q4 2016, and the weakest since Q4 2015,” says Jake Avayou, vice president and senior covenant officer at Moody’s.

Furthermore, during Q1 2017, protection in four of the six risk areas weakened from Q4 2016, specifically, cash leakage, leveraging, liens subordination and structural subordination risk.

Despite the weakening trend, covenant quality scores for Asia-Pacific still remained stronger than other regional averages, at 2.60 compared to the global average of 3.47, and substantially above the North American average of 3.71. 

During the quarter, Moody’s scored 20 high-yield bonds, the most since they began scoring in 2011.

The average covenant quality score for the bonds of Chinese property developers weakened further. Moody’s scored nine such bonds in Q1 2017 and the average covenant quality score was 3.35, weaker than the Q4 2016 average of 2.92.

Chinese developers' average score from January 2011 through the first quarter of 2017 weakened to 2.83 from 2.78 through December 2016, and protection in five of the six risk areas weakened in Q1 from Q4 2016, with only leveraging showing an improvement.

The six risk areas are cash leakage, investments in risky assets, leveraging, liens subordination, structural subordination and change of control.