(원문)Fitch:Emerging Market Bond Covenants Fall Short

[이데일리 이태호기자] 다음은 피치의 보고서 `Emerging Markets Corporate Bonds: Incurrence Based Covenants Fall Short`의 원문 요약이다.

In a report published today, Fitch Ratings has commented that covenant packages for non-investment grade emerging market corporate bonds issued in recent years have been weakly structured, as covenants necessary to protect bondholders from negative credit migration and event risk have typically not been included.

Covenant limitations have been lax, with significant carve outs, enabling issuers to increase financial leverage (particularly debt ranking ahead of unsecured bonds), causing higher structural subordination risk. Furthermore, the credit crisis that took root in 2007 has highlighted some new shortcomings in non-investment grade covenants, for example, the lack of limitation on hedging obligations.

Fitch believes that non-investment grade emerging market bondholders would be better placed to protect their credit exposures at times of issuer financial stress if they benefited from maintenance-based covenants.

"The problem with incurrence-based covenants is that they are only effective, for example, when an issuer wants to raise additional debt," says Siew-Huey Loong, Director with the agency's Asia Pacific Corporates Ratings Group. "Therefore, while lenders with maintenance-based covenants are able to enter into negotiations with the borrowers at an early stage given regular monitoring of credit metrics, bondholders with incurrence-based covenants do not enjoy the same protection," adds Ms. Loong.

Fitch notes in the report that compared to covenants in structured finance obligations, covenants in corporate bonds typically have almost no impact on the ratings of the issuer or the specific debt instrument, as they are designed to address event and migration risks which are not captured in the ratings. Covenants typically are not designed to prevent events that might be detrimental to the credit profile from occurring, rather to give investors more leverage if such events do take place.

One of the findings of the agency's study is that some issuers that have gone through restructurings in a previous crisis have been subject to more stringent structures and covenants when they subsequently issued bonds. "However, even these bond structures and covenants may become watered down and ineffective in a cheap credit environment," notes Raymond Hill, Senior Director in Fitch's EMEA/Emerging Markets Corporate Ratings Group.

"The relative strength of bondholders to negotiate the inclusion and the nature of covenant packages in restructurings will depend on the individual circumstances of each situation. In some cases observed by Fitch, the bondholders' position relative to secured creditors was so disadvantaged they had only a limited influence in negotiating a restructuring," notes Mr. Hill.

In addition, Fitch points out in this report that during the current credit crisis, new problems have emerged relating to covenants. For example, the Latin America bond markets have experienced a significant increase in debt defaults during H208. In some cases, the defaults have been attributable to foreign exchange losses associated with derivatives contracts.

"The limitation on hedging obligations clause has turned out to be lacking, as issuers have ventured into speculative directional hedging," says Jose Vertiz, Director in Fitch's Latin America Corporate Ratings Group. "The emergence of new problems with covenants, and the re-emergence of old problems with restructured covenants, serves to emphasise the importance of closely analysing non-investment grade covenants and of investors ensuring that they are adequately protected at the time of issuance. It is imperative that bond investors are fully aware of these issues when the credit cycle turns," adds Mr. Vertiz.

The report, "Emerging Markets Corporate Bonds: Incurrence Based Covenants Fall Short", uses cross-border non-investment grade non-financial corporate bond issues from emerging markets in EMEA, Latin America and Asia as examples. In the report, Fitch analyses three key covenants, using case studies to illustrate the weakness of some of these protections. The report then describes the key structures and characteristics of the bonds and how these structures, if weakly crafted, may not protect the bondholders against credit migration or event risk.

Lastly, Fitch highlights some of the covenant weaknesses which have emerged during the current credit crisis, as well as cases where covenant weaknesses had not been addressed appropriately during previous restructurings. The case studies illustrate how the agency's views have translated into rating actions.