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Covenant fright: Asia’s high yield boom comes at expense of investor protection

The good, the bad and the insidious in Asian high yield bonds.

Here are two facts.

One: a bank tells us that its year-to-date volumes in Asian high yield bond issues are up fourfold in a year.

Two: Moody’s says the covenant quality on Asian high yield bonds has fallen to its weakest level on record.

The two are not unrelated.

These are remarkable times for high yield, in Asia and worldwide. Globally, Moody’s says that 2018 is already on track to be a record for high yield in dollars, eclipsing 2017’s $453 billion, itself a record.

But there is a more significant subset of that data: that $115 billion of the global 2017 dollar high yield total was rated B3 or lower, up 53% year-on-year, making up more than a quarter of all high yield; and that the Caa grade was up 83.9% year-on-year to $43 billion.

Patterns like this are being reflected in Asia too, as Indonesia and India have joined China as prolific sources of high yield corporate deals. That’s no surprise: investors want yield and they have to venture down the credit curve to get it. Asia is no different from anywhere else in that respect.

Getting worse

But it should not escape anybody’s attention that in the fourth quarter of 2017, Moody’s assessment of covenant quality on Asian high yield bonds fell to its lowest level since the measure was invented at the start of 2011.

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