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Monday, October
05, 2020 10:16 AM /by Moody's Investors Service/ Header Image
Credit: Investors Diurnal Finance Magazine
Moody's Investors Service says in a new report that
the quality of covenants in full-package emerging market (EM) bonds has dropped
significantly over the past six months, with in particular cash leakage and
risky investments scores continuing to weaken.
Still, EM covenant quality remains considerably
stronger than in North America and EMEA, with EM bonds having stronger scores
in five of the six key risk areas.
"The weaker scores in particular for cash
leakage and risky investments can be attributed to repeat Chinese property
issuers that predate their restricted payments income baskets to coincide with
those of their previous bonds," says Jake Avayou, a Moody's Vice President
and Senior Covenant Officer.
In addition, average permitted investments
carve-outs for EM bonds issued during the period increased to 23% of total
assets, compared with 18% for the six months ended 31 March 2020.
Chinese property developers typically negotiate large
permitted investments carve-outs that enable them to invest in or enter into
joint ventures with entities outside of the restricted group.
"Still, EM bonds compare strongly to North
America and EMEA bonds, with weaker scores only on structural subordination,
which remains a key concern for Chinese bonds," adds Avayou.
Asian companies continued to dominate EM bond
issuance, accounting for 82% of issuance, followed by Latin America at 15%, and
Africa and the Middle East at 3%. There were no bonds from Emerging Europe in
the six months ended 30 September 2020.
Moody's CQ score combines six factors: (1) cash
leakage, (2) risky investments, (3) leveraging, (4) liens subordination, (5)
structural subordination and (6) change of control.
The average CQ score for EM bonds issued over the
past six months is now at the weakest level since Moody's published its first
EM covenants report in September 2018, and is also much weaker than the average
2.95 (moderate) CQ score for the period from January 2011 through 30 September
2020.
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