As Asian fixed-income assets become an increasingly important part of global debt capital markets, the Hong Kong Investment Funds Association (HKIFA) has proposed seven best practices for issuers and portfolio managers.
The aim is to ensure international credit standards, investor protection and long-term healthy development of the market.
Top of the HKIFA's wish list are "quality covenants in bond indentures that remain in place through the life of the bond with adequate compensation to bondholders in case there is a change".
In recent years, some Asian issuers have kept changing or loosening covenants to be able to incur more debt and reduce creditor protection, says Bryan Collins, portfolio manager at Fidelity Worldwide Investment and a member of the HKIFA's bond fund managers working group.
He believes this happens in Asia more than in developed markets because “investors in Asia are not fully aware of the importance of covenants".
Moreover, standards on covenants are lowered when debt instruments are in demand, such as in the nascent dim-sum bond market, notes Stephen Chang, head of Asian fixed income at JP Morgan Asset Management, also a member of the HKIFA working group. For the same issuer, he adds, “the covenants on US dollar bonds are stricter than for dim-sum bond offerings".
Some dim-sum bonds below investment grade do not have covenants, says Collins, but “as the market develops, it is vital for those instruments to have the same kind of covenants as in other markets”.
The HKIFA also wants to see improvements in primary-market placement and the provision of equal information and treatment to all classes of investors, including the removal of private banking rebates and avoidance of market re-taps.
In recent years, and mainly in Asia, underwriters and lead managers offered rebates to selected potential investors during bond IPOs, explains Chang. “This is not dealing fairly with all investors and is not good for the healthy development of the bond market in Asia in the long run.”
Providing incentives to certain investors may distort the underlying investor mix, says Collins. “You don’t want the same type of investors who hold and sell the bonds at the same period of time," he adds. "A healthy mix should include all sorts of institutional and retail investors; that provides stability, liquidity and an efficient price discovery mechanism.”
Moreover, the HKIFA encourages Asian bond issuers to obtain ratings so as to improve liquidity and transparency for investors.
In the dim-sum bond market, a high 41% of issuance is non-rated (as of May 31), mostly due to the huge primary-market demand for the instruments. Yet Chang expects that in the long term these non-rated bonds are likely to be illiquid in the secondary market.
“It is important that the level of due diligence and discipline [associated with credit ratings] are not taken away,” Collins adds.
Best practices are there to prevent deterioration of credit quality and standards demanded by international investors, notes the HKIFA.
Other standards expected by international investors include quality and timeliness of disclosure, seniority of payment, improvements to corporate governance and greater stakeholder accountability, adds the association.