The average covenant quality (CQ) score for Asian full-package high-yield bonds improved by 3% in the first quarter (Q1) of 2021 to 3.54 (weak) from an all-time weakest quarterly score of 3.63 (weak) in the previous quarter, said Moody’s recently.
A lower score denotes stronger covenant quality on Moody's 1.0 to 5.0 scale, according to the credit rating agency.
"Although Chinese property bonds accounted for less issuance in Q1 2021 than Q4 2020, more full-package bonds from the country are scoring in the weakest level. We expect more Chinese full- package bonds to score in the weakest level as restricted payments income baskets increase by longer periods of time, fixed-charge coverage ratios are reduced and flexibility to incur secured debt increases," said Jake Avayou, a Moody's Vice President and Senior Covenant Officer.
Chinese property bonds accounted for 16 of the 20 full-package bonds (80%) in Q1, compared with 88% in the previous quarter. The average CQ score for Chinese property bonds improved by 2% to 3.67 (weak) in Q1 from 3.73 (weak) in the previous quarter, Moody’s noted.
However, more full-package bonds are scoring in the weakest level, according to the firm.
Chinese property developer Logan Group Company Limited's (Ba2 stable) Q1 bond received a CQ score of 4.25 (weakest), the weakest for an Asian full-package bond since Moody's began scoring in 2011, the firm added.
The bond scored in the weakest level in five of the six key risk areas — cash leakage, risky investments, leveraging, liens subordination and structural subordination, Moody’s pointed out adding that CIFI Holdings (Group) Co. Ltd.'s (Ba2 stable) Q1 bond also scored in the weakest level with a CQ score of 4.20.
Nevertheless, the average liens subordination score improved from a record weak level, to 3.28 (moderate) from 3.66 (weak) in Q4 2020, the firm said.
This reflects a decrease in issuers' ability to incur incremental secured debt, according to Moody’s.
Twelve of Q1's 20 full-package bonds (60%) had an incremental secured debt to EBITDA ratio of three times or more as of the issue date, compared with six of eight full package bonds (75%) in the previous quarter, Moody’s said.