The fledgling Canadian high-yield bond market offers greater investor protection than high-yield U.S. bonds, says Moody’s Investors Service in a new report.
Moody’s says that Canadian bonds have tighter covenants, which provide more protection for investors than offerings by U.S.-based companies. And, domestic high-yield bonds denominated in Canadian dollars offer more investor protection than high-yield cross-border bonds that Canadian companies issue in U.S. dollars, it says.
“High-yield bonds issued by Canadian companies have stronger covenants than their US peers, offering investors more protection,” said Ed Sustar, a Moody’s vice president and senior credit officer. “These protections include prevention of structural subordination, and preserving cash flow for debt service through tighter restricted payments and debt incurrence provisions.”
Moody’s suggests that one possible explanation for the difference is the limited number of investors in the relatively new Canadian high-yield market, which allows investors to influence the covenant structure.
The rating agency reports that, since 2010, non-financial speculative-grade Canadian companies have raised about C$9 billion (US$9.2 billion) in the domestic bond market. While that total is up from zero in 2008, over the same period, Canadian firms have raised US$20 billion in cross-border bonds in the more established U.S. market. And, it pales in comparison to the US$3.3 trillion in US-based high yield issuance during the same period.
“In this fairly nascent market, less-known Canadian issuers may offer stronger covenant packages to attract a wide investor base,” added Sustar. “In addition, weaker covenants are more common in the U.S., thanks to the greater number of private equity sponsored and high-yield lite deals, compared to the Canadian market.”
Moody’s reports that it has analyzed the covenant quality of about 1,000 bonds that were issued over the past two years globally. Overall, covenant quality for domestic and cross-border high-yield bonds issued by Canadian companies, excluding high-yield lite bonds, was stronger than in the U.S. but weaker than in Asia, the Europe, Middle East and Africa (EMEA) region, and Latin America, it says.