5. Credit ratings and bondholder rights in Asia
This chapter focusses on credit risk assessment of corporate bond issuers and bondholder rights, benefiting from the insights of the OECD Survey conducted among 19 regulators from 18 Asian jurisdictions and Australia. It addresses topics including the existence of credit rating agencies and alternative credit rating systems, as well as the requirements related to credit ratings for issuing corporate bonds. It also examines various aspects supporting the protection of bondholder rights such as trustee requirements, insolvency frameworks, covenants in corporate bond contracts and the presence of industry associations.
Credit ratings play a crucial role in corporate bond markets by providing investors an opinion about the creditworthiness of the issuer. Credit rating agencies generally analyse available information to assess the credit risk, presenting their findings in an accessible and understandable format for use by market professionals. Since not all issuers target the same type of investors, international CRAs play a role to help domestic issuers in accessing global capital markets, while domestic CRAs usually focus on addressing the needs of domestic investors. In general, easy and affordable access to rating agencies and familiarity with the rating process significantly increases companies’ ability to use long-term debt securities (Çelik, Demirtaş and Isaksson, 2020[1]). The OECD Survey explores several aspects of the credit rating systems available in Asia.
All jurisdictions have registered at least one or more credit rating agencies (CRAs) (Figure 5.1, Panel A). Results from the survey also indicate that the CRAs operating in nine jurisdictions1 are domestic CRAs, while international CRAs and regional CRAs operate in a small number of jurisdictions. Both domestic and international CRAs2 are operating in Australia, Chinese Taipei and Viet Nam. International CRAs operate only in Hong Kong (China) and Singapore, and only a regional CRA is used in Lao PDR. China, India and Thailand have domestic, regional and international CRAs operating in their markets. International CRAs operate in ten jurisdictions.3
Obtaining a credit rating for a bond issuance from CRAs can be unaffordable for smaller issuers which could impede their access to corporate bond financing. To address this issue and support market-based financing for smaller companies, some jurisdictions have introduced alternative credit rating systems where an institution other than a CRA provides rating services. Outside Asia, some markets have established alternative rating systems. In France, the Banque de France provides a credit score for individual firms for a fee, through the FIBEN (Fichier bancaire des entreprises) system.4
In Asia, alternative credit rating systems have been adopted only in three jurisdictions (Hong Kong (China), Korea and Malaysia) (Figure 5.1, Panel B). In Korea, the collateralised bond obligations guarantee scheme introduced by the Korea Credit Guarantee Fund (KODIT) uses an internal credit rating system to evaluate the credit risk of non-financial corporations to facilitate financing at a lower cost and allow institutional investors to purchase high-credit quality bonds. KODIT has developed three credit risk assessment models to assess the credit risk of credit guarantees granted to corporations. The Corporate Credit Rating System (CCRS) evaluates the credit risk of companies with total assets over KRW 1 billion. The Small Enterprise Scoring System (SESS) and the Start-up Business Scoring System (SBSS) assess the credit risk of SMEs and start-up companies respectively (KODIT, 2019[2]).5
Similarly, in Malaysia, the SME Corporation Malaysia6 is a government agency that co-ordinates the implementation of development programmes for SMEs across all related ministries and agencies. It acts as the central point of reference for research and data dissemination on SMEs and entrepreneurs, as well as providing business advisory services for SMEs and entrepreneurs throughout Malaysia. It also offers an SME Competitiveness Rating for Enhancement (SCORE). SCORE is a diagnostic tool used to rate and enhance the competitiveness of SMEs based on their performance and capabilities. SCORE has also been used as a business matching tool for better market access, as well as an initial indicator for the purposes of access to finance.7
The alternative credit scoring system in Hong Kong (China) is designed to allow SMEs to access bank financing (Hong Kong Monetary Authority, 2020[3]). This alternative credit scoring offers banks the ability to expand the range of data that they use to assess an entity’s creditworthiness. Whereas conventional credit scoring uses a limited range of financial data, the alternative credit scoring takes advantage of new technology to obtain and use alternative data that can provide valuable insights about an entity’s creditworthiness. This alternative data may include information about, for example, an entity’s trade payments, sales transaction records, credit analysis reports and the behavioural characteristics of its business executives.
Source: OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia, see Annex B for details.
Having international CRAs operating in the domestic markets could contribute to the accuracy of the overall rating process and could indirectly enhance the development and expansion of domestic CRAs in Asia. Additional information provided by the surveyed jurisdictions indicate that both in Malaysia and Bangladesh some of the domestic CRAs are affiliated with international CRAs through their stakes in domestic CRAs. For example, in Malaysia, Moody’s Asia Pacific Limited owns 19.5% of Malaysian Rating Corporation Berhad (MARC, a domestic CRA) while S&P Global Asian Holdings Pte Ltd. owns 19.2% of Rating Services Berhad (RAM Ratings, a domestic CRA).
IOSCO provides guidance in its Code of Conduct Fundamentals for Credit Rating Agencies considering possible challenges with CRA systems and decision-making process (IOSCO, 2015[4]). Also, national authorities in certain jurisdictions have adopted regulations to ensure sound regulatory practices and governance of CRAs. For example, European regulation8 prevents authorities from interfering in the content of credit ratings or in their methodologies. In the United States,9 the Securities and Exchange Commission is not allowed to interfere in the content of credit ratings nor the procedures and methodologies. In Asia, similar frameworks have been established in Australia, Hong Kong (China) and Singapore amongst others.
With the aim of improving rating quality through mutual co-operation among domestic CRAs in the region, the Association of Credit Rating Agencies in Asia (ACRAA) was established in 2001. ACRAA addresses issues relating credit ratings by promoting best practices, offering joint training and collecting global regulatory information. Since then, 28 members have joined the ACRAA initiative from 15 Asian jurisdictions. Table 5.1 shows the 2023 list of domestic CRA members of ACRAA. China and India have the highest number of domestic CRAs that are members of ACRAA (five), followed by Bangladesh (four), Malaysia and Pakistan (two each). In other jurisdictions, there is only one domestic CRA that is affiliated with ACRAA.
As a comparison, in Europe, domestic and regional CRAs also play an important role in some markets as the current European regulation requires credit rating agencies to be certified or registered with the European Securities and Markets Authority (ESMA) to rate a European bond issuer. A total of 30 rating agencies have registered with ESMA and three are registered in non-European countries, specifically, in Japan, Mexico and the United States. Germany has the largest number of domestic CRAs (five), followed by Italy (three), Spain (two) and Ireland (one). In seven European jurisdictions, these rating agencies have affiliations to internationally recognised CRAs (Table 5.2).
Credit ratings also play an increasingly important role in the corporate bond market by influencing the investment decisions and asset allocation of financial and non-financial institutions in a number of different ways. One of them is through regulations that impose quantitative limits on holdings of corporate bonds such as risk-based capital requirements. Credit ratings are also used extensively in investment choices through self-defined investment policies by investors who focus exclusively or primarily on buying investment grade bonds. Moreover, many bond investment funds are also bound by rating-based indexes and investment mandates that are defined with reference to ratings. Importantly, cross-border investments in corporate bonds, which now constitute a significant share of the global market, are also likely to depend on rating- or index-based strategies (Çelik, Demirtaş and Isaksson, 2020[1]).
A credit rating is required to issue a corporate bond in 12 jurisdictions (Bangladesh, Cambodia, India, Indonesia, Korea, Lao PDR, Malaysia, Mongolia, Pakistan, Philippines, Sri Lanka and Thailand; Figure 5.2, Panel A). Additionally, within jurisdictions where ratings are required for bond issuance, at least one rating is required in 80% of the jurisdictions and two ratings are required in two jurisdictions (Bangladesh and Korea) (Figure 5.2, Panel B). For example, in Korea, most corporate bonds are issued without guarantee and where a financial investment company underwrites these bonds credit assessment from two or more CRAs is required (ADB, 2018[7]).
Four jurisdictions require an investment grade rating for corporate bonds (Bangladesh, Indonesia, Pakistan and Sri Lanka) and a minimum level for credit rating other than an investment grade rating is required in seven jurisdictions (Cambodia, India, Korea, Lao PDR, Malaysia, Philippines and Thailand) (Figure 5.2, Panel B). For instance, detailed information provided by the survey respondents suggests that no credit rating is required in the case of unlisted privately placed bonds in Pakistan and one notch above investment grade rating is required for corporate bond issuance in Sri Lanka. In Bangladesh, for private placement, a minimum BBB rating in the long-term is required. Similarly, a minimum A rating in the long-term is required for public issues. In Indonesia, securities that can be issued through a continuous public offering of debt securities and/or sukuk have a rating that is included in the top four categories based on the Securities Rating Companies’ rating classification.
Source: OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia, see Annex B for details.
Important characteristics differentiate corporate bondholders from other creditors, especially banks. Corporate bondholders tend to be more dispersed than other creditors. This results in challenges related to monitoring and co-ordination, for example making it more difficult for bondholders to take action when issues arise. In addition, the existence of intermediaries such as custodians could pose a challenge for bondholders and issuers to. During insolvency procedures this can be problematic because the company may have to undertake a process to ask bondholders to identify themselves (de Oliveira, Magnusson and Mulazimoglu, 2022[8]; Brodie, 2017[9]).
The OECD Survey investigated different aspects supporting the protection of bondholder rights in 18 Asian jurisdictions and Australia, including trustee requirements, insolvency frameworks, covenants in corporate bond contracts and the existence of industry associations.
5.2.1. Role of the trustee
In corporate bond markets, trustees play one of the most important roles in protecting the rights of bondholders. The specifics of how the trustee performs its duties will vary depending on each bond contract and the framework in each jurisdiction. However, there are often few incentives for trustees to act early to protect bondholder rights. This can be attributed to their fixed fee structure (typically paid by the issuer) and the varying obligations of trustees, with some not having a mandate to actively monitor until a covenant breach occurs. Trustees will need to be indemnified and instructed to act in many circumstances, which will depend on the specific facts. The annual fixed fee for the trustee does not take into account the additional work that is involved or the potential liability of the trustee taking action on behalf of the bondholders. In relation to their monitoring role, a trustee is usually provided with an annual compliance certificate/report in relation to the covenants of the bond contract drafted by the issuer. However, this is usually a simple compliance statement, and the trustee may not have to take active steps to assess whether the report is accurate (de Oliveira, Magnusson and Mulazimoglu, 2022[8]). In a number of Asian markets, it is also common for non-trustee fiscal agent structures to be present.
In 14 of jurisdictions (Australia, Bangladesh, China, India, Indonesia, Japan, Lao PDR, Malaysia, Pakistan, Philippines, Singapore, Sri Lanka, Chinese Taipei and Thailand) the legal or regulatory framework requires the appointment of a trustee for corporate bond issuances (Figure 5.3, Panel A). In all jurisdictions, the trustee is required to be appointed by the issuer. In two jurisdictions (Hong Kong (China) and Mongolia), while the legal or regulatory framework does not require the appointment of a trustee, it is a market practice for an issuer to appoint a trustee. In 17 of the 19 jurisdictions, the trustee is paid by the issuer.
Source: OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia, see Annex B for details.
In Singapore, the details about who pays the trustee are not prescribed in the legal or regulatory framework, but rather it depends on what is specified in the trust deed. In Indonesia, only when it comes to large-company bonds, the legal and regulatory framework requires the issuer to appoint the trustee. Under OJK regulations, although the trustee represents the interests of holders of debt securities and/or sukuk, the trustee contract is stipulated to be an agreement between the issuer and the trustee specifically for the issuance of debt securities and/or sukuk. The trustee requirement does not apply to securities crowdfunding used by SMEs where financing is raised directly from investors through an open securities crowdfunding platform. In this case, the relevant framework was provided by an OJK regulation, which aimed to provide alternative funding for SMEs, as well as business start-ups to obtain funds through the capital market, by expanding the scope of securities offerings in crowdfunding services (OJK, 2020[10]; 2020[11]; Government of Indonesia, 2023[12]).
In the 19 jurisdictions surveyed, trustees play a range of core roles, as shown in Figure 5.3 (Panel B). The primary role of the trustee is to receive information from the issuer regarding compliance with its various covenants (16 jurisdictions). This is followed by the trustee having the discretion to act on behalf of bondholders, for example when there is a declaration of a default event, when bond covenants are triggered, among other events (11 jurisdictions). Other less common roles are: distributing funds in accordance with the payment waterfall following an enforcement (8 jurisdictions); holding the security interest on behalf of bondholders (8 jurisdictions); and holding the payment obligation and other covenant obligations on behalf of the bondholders (3 jurisdictions).
One of the examples of these trustee roles is from Bangladesh, where the trustee of a debt security only bears the legal/regulatory obligations on behalf of bondholders and the trustee is not bound by financial obligations. In Indonesia, new regulation aims at strengthening the independence, objectivity and professionalism of the trustee in carrying out their duties (OJK, 2020[10]).
Three jurisdictions (Malaysia, Singapore and Chinese Taipei) responded that there were other roles for the trustee. In Malaysia, the specific duties and powers of the trustee are specified in the law and guidelines (Government of Malaysia, 2007[13]; SC Malaysia, 2020[14]). Among the duties of the trustee in Malaysia are the following: it must be satisfied that information disclosed in relation to the bond is not inconsistent with the terms, provisions and covenants; ensures the borrower complies with the Malaysian Companies Act; takes reasonable steps to ensure that the borrower remedies a covenant breach; notifies the Securities Commission if a breach is not remedied by the borrower and call a meeting of bondholders; present proposals to protect bondholder interests and obtain their directions. In addition, Chapter 19 of the Malaysian Securities Commissions Guidelines on Trust Deeds specifies powers and duties of the trustee. For example, the trust deed must require the trustee to use a reasonable degree of skill and diligence in exercising their rights and powers in the event of default or enforcement and to notify credit rating agencies about material events where corporate bonds or sukuk are rated.
In Chinese Taipei, the Company Act sets out other the role of the trustees, which includes: receiving the complete list of bondholders prepared by the board of directors; checking and supervising the performance by the company in relation to the obligations associated with corporate bonds, for the interest of bondholders; convening meetings of corporate bondholders for matters concerning the common interest of corporate bondholders; and executing the resolutions adopted at the meeting of corporate bondholders (Gorvernment of Chinese Taipei, 2021[15]). In Singapore, the Securities and Futures Act 2001 requires trustees to exercise due diligence and vigilance in carrying out their functions and duties, and in safeguarding the rights and interests of bondholders.
5.2.2. Insolvency frameworks
While approaches may differ, effective corporate insolvency frameworks share common objectives. One of the main objectives is to promote the reorganisation of viable but financially distressed firms, and also to facilitate the reallocation of assets of non-viable businesses (World Bank, 2016[16]). The existence of effective and efficient insolvency frameworks in the markets is also recognised by the G20/OECD Principles on Corporate Governance, “[t]he corporate governance framework should be complemented by an effective and efficient insolvency framework and by effective enforcement of creditor rights” (OECD, 2023[17]).
Studies have demonstrated that effective insolvency systems are associated with an increase in the general availability and cost of credit, and a higher recovery rate for creditors (World Bank, 2014[18]). Functioning insolvency laws that govern formal procedures for financially distressed companies are required prior to formal bankruptcy procedures. Importantly, the performance of an insolvency framework is greatly dependent on the efficiency of the judicial system within which it operates (OECD, 2021[19]).
Fourteen jurisdictions include provisions for “negotiation to occur between bondholders and bond issuers” (Figure 5.4, Panel A). While negotiations can occur at any time and in any jurisdiction, the negotiations referred in this report relate to situations where there are provisions outlined in the legal or regulatory frameworks. For example, in the Philippines, the law provides for pre-negotiated rehabilitation, which aims to help companies that are insolvent or may become insolvent. This option is generally available only where the company can show creditors that the recovery will be higher if the company continues as a going concern rather than being liquidated quickly (Government of the Philippines, 2010[20]; Clifford Chance, 2018[21]).
In addition, 13 jurisdictions have provisions in their insolvency frameworks that allow “firms to initiate insolvency proceedings before becoming insolvent” (Figure 5.4, Panel A). It is important to note that insolvency proceedings comprise both reorganisation and liquidation procedures. For example, in Australia, under the Corporations Act 2001, the company has the option in certain circumstances, to commence a voluntary winding up of a company when the company is solvent. This does not require a court sanction (Government of Australia, 2001[22]).
Source: OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia, see Annex B for details.
Nine jurisdictions have a “debtor-in-possession” style reorganisation procedures (Australia, Hong Kong (China), Japan, Korea, Philippines, Singapore, Chinese Taipei Thailand and Viet Nam) (Figure 5.4, Panel A). These structures allow management to continue running the company during the restructuring procedure. For example, in Japan, civil rehabilitation is the general debtor-in-possession reorganisation procedure. It is broadly similar to the Chapter 11 proceedings in the United States, which is sometimes referred to as reorganisation bankruptcy. While the civil rehabilitation procedure was initially introduced for SMEs in Japan, all types of companies and individuals can follow this procedure. The purpose of the Civil Rehabilitation Act is to form rehabilitation plans that are consented to by a number of creditors and confirmed by the court, to co-ordinate the various rights and obligations of debtors and creditors. Either the company or the creditors can apply to the court for civil rehabilitation if the required circumstances are met (Government of Japan, 1999[23]; Clifford Chance, 2018[21]; Nishimura & Asahi, 2011[24]).
“Out-of-court workouts/restructuring”10 frameworks are present in the insolvency frameworks of nine jurisdictions (Australia, China, Hong Kong (China), Indonesia, Japan, Malaysia, Philippines, Sri Lanka and Viet Nam) (Figure 5.4, Panel A). An example of this restructuring is a distressed debt exchange, which is a way for a company in default to resolve its financial distress. A distressed debt exchange can be proposed by a company for several reasons, for instance, it may aim to: avoid a bankruptcy; improve liquidity; reduce debt; manage its maturity dates; and to reduce or eliminate onerous covenants. There are various benefits of distressed exchanges to corporations facing difficulties and their investors. Bankruptcy can be a lengthy and devaluing process, which can possibly be avoided by a distressed exchange. Creditors may accept a distressed debt exchange as they anticipate that the outcome may be worse for them under a bankruptcy (de Oliveira, Magnusson and Mulazimoglu, 2022[8]). It has been documented that distressed exchanges increase recovery rates compared to a bankruptcy situation (World Bank, 2014[18]), however unsuccessful distressed debt exchanges may mean that bankruptcy is more likely (Fitch Ratings, 2020[25]). Generally, distressed exchanges are offered to a specific subset of creditors, which can make the transaction easier.
Some jurisdictions have developed standardised out-of-court restructuring processes, which are centralised frameworks designed for large numbers of restructurings where the debtors have common characteristics (FSB, 2022[26]). In Philippines, the Financial Rehabilitation and Insolvency Act of 2010 recognises out-of-court restructuring agreements and rehabilitation plans to be analogous to a court sanctioned plan. There are several conditions for this to occur: firstly, the company must agree to it; and secondly, the plan must be approved by creditors who hold at least 85% of the total liabilities of the company. The plan must be published for several weeks in a newspaper of general circulation in Philippines (Government of the Philippines, 2010[20]; Clifford Chance, 2018[21]). Korea has already included certain out-of-court restructuring procedures in their insolvency system. In an aim to improve the procedures, the revised version of the insolvency regime enacted in 2001 included shorter deadlines, allowed debtor-in-possession structures and permitted shareholders to repurchase converted equity (Bergthaler et al., 2015[27]).
“Hybrid restructuring regimes” are provided for in the insolvency frameworks of 8 jurisdictions (Hong Kong (China), India, Korea, Lao PDR, Malaysia, Singapore, Sri Lanka and Viet Nam) (Figure 5.4, Panel A). These hybrid regimes are informal workout procedures that combine contractual workouts with limited court intervention. They may involve “[s]ome formal legal elements (e.g. stay on assets, cram downs), but negotiations are primarily conducted directly between debtor and creditor(s) without court involvement” (de Oliveira, Magnusson and Mulazimoglu, 2022[8]). Hybrid restructuring mechanisms can be a preferred option in times of economic crisis, as they do not solely rely on court processes which may be under pressure. Research has shown that “[h]ybrid restructuring provides an effective way of dealing with hold-out creditors, since it may involve the limited intervention of the courts with the effect of blocking creditor actions (stay of creditor actions) or imposing a restructuring plan adopted by a majority (binding the dissenting creditor minority)” (Dutra Araujo et al., 2022[28]).
A small number of jurisdictions (Australia, India, Singapore and Viet Nam) have a specialised growth company or SME bankruptcy regime to fast-track reorganisation and liquidation for these companies (Figure 5.4, Panel A). These streamlined processes can help firms to exit the mark and prevent the accumulation of “zombie firms” (World Bank Group, 2021[29]). For example, the Australian government introduced small business-specific amendments to the insolvency laws to mitigate impacts of the COVID-19 pandemic. The amendments permit a liquidator to use a new small business liquidation process, instead of the general creditor’s voluntary liquidation process, to expedite the creditor’s voluntary winding up process. The amendments also provide a debt restructuring process for eligible small companies (Government of Australia, 2001[22]; 2020[30]). In Singapore, the Insolvency, Restructuring and Dissolution Act 1998 was amended in 2020 and came into effect in 2021 to create a Simplified Insolvency Programme (Government of Singapore, 2018[31]). The act states that the aim is to provide “a simplified process for the restructuring of debts to any eligible company that seeks to enter into a compromise or an arrangement between the company and its creditors or any class of those creditors.” The intention of the programme is to allow for “simpler, faster, and lower-cost proceedings to assist micro and small companies in need of winding up or restructuring” (Ministry of Law, 2023[32]). The simplified programme consists of a Simplified Debt Restructuring Programme (restructuring of debts and possible rehabilitation for viable businesses) and a Simplified Winding Up Programme (where non-viable businesses are wound up in an orderly manner).
Some countries have additional provisions in their insolvency frameworks. For example, in Bangladesh, where there is default by a bond issuer and subject to a declaration of bankruptcy by the appropriate court, the court will appoint a liquidator who will liquidate the assets and pay out the obligations as per the seniority of the bondholder along with other claimholders. This court-settled liquidation process may take several years or even decades to finally be executed completely (Government of Bangladesh, 1994[33]; 1997[34]).
In 15 jurisdictions there is a system to record and/or identify bondholders (China, Hong Kong (China), India, Indonesia, Japan, Lao PDR, Malaysia, Mongolia, Pakistan, Philippines, Singapore, Sri Lanka, Chinese Taipei, Thailand and Viet Nam) (Figure 5.4, Panel B). One of the key challenges in a restructuring or insolvency procedures relating to a corporate bond is the identification of bondholders. To name a few systems, the one in Hong Kong (China) records and identifies bondholders for the bonds lodged with the Central Monetary Markets Unit (CMU) operated by the Hong Kong Monetary Authority (HKMA). This is run by the Central Moneymarkets Unit, which is owned and operated by the Hong Kong Monetary Authority. This is the clearing and settlement system in Hong Kong for debt securities denominated in Hong Kong dollars and other major currencies (HKMA, 2023[35]). In Thailand, there is a similar registration system, which was introduced by the Bank of Thailand in 2021. This requires investors to be registered before investing in Thai bonds. The aim of the system is for the Bank of Thailand to have “comprehensive, correct, and readily available data with regards to investment in Thai bond market to ensure proper market surveillance and timely policy implementation” (Bank of Thailand, 2023[36]).
5.2.3. Role of covenants in corporate bond contracts
Covenants in bond contracts are the main corporate governance tool of bondholders. Certain provisions in corporate bonds and other debt contracts may significantly limit the discretion of management and shareholders, such as covenants that restrict dividend payouts, require creditors’ approval for the divestment of major assets, or penalise debtors if financial leverage exceeds a predetermined threshold. Moreover, under financial stress but before bankruptcy, companies may choose to negotiate a waiver of compliance with a covenant, when existing creditors may require changes in the business. As a consequence, the timely disclosure of material information on debt contracts, including the impact of material risks related to a covenant breach and the likelihood of their occurrence, in accordance with applicable standards, is necessary for investors to understand a company’s business risks.” The revised G20/OECD Principles of Corporate Governance provide in Principle VI specific guidance for listed issuers with respect to disclosure, transparency and debt contracts, including the risk of non-compliance with covenants (OECD, 2023[17]).
Notably, all jurisdictions require material information disclosure on covenants. Additionally, Figure 5.5 provides information on the most commonly included covenants in corporate bond contracts during the last five years. Across the 19 jurisdictions the most common covenants over the past five years were considered to be “leverage restrictions”, “secured debt restrictions” and “subordinated debt restrictions”. The least common were “dividend payment restrictions”, “cross-default provisions” and “sale and lease-back restrictions”. This contrasts the findings from some other jurisdictions such as the United States where the three covenant types that were used in approximately 90% of investment and non-investment grade bond contracts in 2020 were cross-default provisions, merger restrictions and asset sale restrictions (de Oliveira, Magnusson and Mulazimoglu, 2022[8]). The results also highlight differences across jurisdictions in the use of covenants. For example, “asset sale restrictions” and “investment policy restrictions” were considered to be common in seven jurisdictions and not common in six jurisdictions.
Source: OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia, see Annex B for details.
5.2.4. Changes in bondholder rights
The OECD Survey also assessed the perspective of regulators on whether there had been an increase or decrease in bondholder rights in their jurisdiction over the previous five years. While most jurisdictions did not have data-based metrics to respond to this question 11 jurisdictions considered that there had not been a change in bondholder rights over the past five years (Figure 5.6, Panel A). In 7 jurisdictions, the perception was that there had been an increase in bondholder rights, while no jurisdiction perceived a decrease in bondholder rights over this period.
Source: OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia, see Annex B for details.
An example of a jurisdiction taking steps to improve bondholder rights is India. In India, SEBI has taken various steps to develop the corporate bond market as well as to protect the interest of investors. For instance, the declaration of information about why the audit is conducted and who is doing the audit is required to improve the information available to and the decision making of bondholders. There are now requirements for an e-voting facility for bondholders who have a digital account to hold and trade financial securities (known as a “demat account”), so that they can vote from anywhere. The Securities and Exchange Board of India has mandated disclosures pertaining to analyst meetings, investor meetings and conference calls so that information asymmetries and information sharing with only a few investors can be eliminated (SEBI, 2020[37]; 2015[38]). There are also now provisions pertaining to the appointment of a nominee director to protect the interests of bondholders (SEBI, 2023[39]).
Another example of a measure to improve bondholder rights is in Bangladesh, where the Securities and Exchange Commission is developing a bond management platform to supervise and ensure the matters related to coupon payment, default mechanism, due diligence of bondholder rights in case of distress or default by the borrower. Mongolia also made changes in 2021 and 2022, so that a debt instrument must have a collateral, a trustee or guarantee, or the bond issuer must be credit-rated by a locally or internationally recognised agency in order to secure the payment obligations of both the privately and publicly offered debt instruments and to protect bondholder rights (Mongolian Financial Regulatory Commission, 2021[40]; 2022[41]).
Relatedly, the Securities and Exchange Commission of Thailand sent a circular letter relating to the expectation of bondholder representative (trustee) duties which solidified the rights of bondholder. In addition, there were a series of changes in 2019 that strengthened bondholder rights, relating to: issuer’s duties (e.g. financial statement must be sent to the bondholder representative (trustee) and they must be informed of an event of default without delay); restrictions in covenants (e.g. on leverage and dividends payable); additional events added to default terms (e.g. where debtors are unable to comply with financial covenants and stopping operations which might have significant impact); and the implementation of additional measures after a bond default (such as auto-acceleration in the case of insolvency/rehabilitation).
5.2.5. Role of industry associations
Industry-led bodies or associations can play a valuable role in promoting the development of markets, lifting the standards of the industry, improving the products offered to investors, and creating a corporate bond market landscape that supports bondholder rights. In 11 jurisdictions there is an industry-led body or industry association that is active in relation to the corporate bond market (China, India, Japan, Korea, Malaysia, Mongolia, Philippines, Singapore, Chinese Taipei, Thailand and Viet Nam) (Figure 5.6, Panel B). The role of these associations varies across jurisdictions. Seven jurisdictions (China, Japan, Korea, Mongolia, Chinese Taipei, Thailand and Viet Nam) reported that the body has a self-regulatory role, seven jurisdictions (China, Japan, Korea, Malaysia, Philippines, Chinese Taipei and Thailand) reported that the body has a role in promoting and developing the debt securities market, and one jurisdiction (Philippines) reported that there is a regional body or association with a role in promoting and developing the debt securities market in the region.
One example is the Thai Bond Association, whose “main purposes are to be a self-regulatory organisation for a fair and efficient operation of the bond market and to be an information centre for the Thai bond market. It also plays functional roles in market development, market convention and standards and being [a] Bond Pricing agency for the industry” (ThaiBMA, 2023[42]). The Thai Bond Association has also published a template for corporate bond contracts to assist the industry with standardising terms and conditions (ThaiBMA, 2023[43]).
While Thailand has a body focusing on the bond market, in other jurisdictions this is covered by associations with a broader remit. For example, in India, there are bodies like the Federation of Indian Chambers of Commerce & Industry, Confederation of Indian industries, Associated Chambers of Commerce and Industry who are involved in various corporate matters, including the bond market.
In addition to the role played by jurisdiction-specific associations relevant work is also conducted via regional and global trade associations and other organisations, for example, the Asia Securities Industry and Financial Markets Association (ASIFMA), the International Capital Market Association (ICMA), and the Asian Development Bank (ADB), among others. They play an important role in promoting the development of bond markets in the region and internationally, sharing best practices and leveraging international experiences. For example, ASIFMA has launched initiatives on critical parts of the market such as bond issuance, credit ratings, transparency and electronification, tax and compliance. Another example in the region is the AsianBondsOnline web portal, that is an ASEAN+3 Initiative supported by the Asian Development Bank, which is a source of information on bond markets in emerging East Asia (ADB, 2023[44]).
In contrast, Singapore reported that the industry-led body active in relation to the corporate bond market does not have a self-regulatory role, and eight jurisdictions (Australia, Bangladesh, Cambodia, Hong Kong (China), Indonesia, Lao PDR, Pakistan and Sri Lanka) reported that there is not an industry-led body or industry association that is active in relation to the corporate bond market in their jurisdiction.
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Notes
← 1. Bangladesh, Cambodia, Indonesia, Japan, Korea, Malaysia, Mongolia, Pakistan and Philippines.
← 2. While international CRAs could provide services to markets in almost all jurisdictions, here refers in the cases where there is a branch of an international CRA or domestic CRAs are affiliated with international CRAs through their stakes in domestic CRAs.
← 3. Australia, China, Hong Kong (China), India, Korea, Singapore, Sri Lanka, Chinese Taipei, Thailand and Viet Nam
← 4. The FIBEN system collects and integrates all available financial information about individual firms and provides credit scores to investors or lenders for a certain fee. The system is accessible for credit institutions, insurance companies and asset management companies, among others. The central bank also performs an independent risk analysis of French enterprises that allows lenders to assess credit risks of potential clients at a low cost, which facilitates access to finance, in particular for SMEs.
← 5. The KODIT is the one of the largest single entity credit guarantee institutions in the world (ESCAP, 2017[45]). It introduced the primary collateralized bond obligations guarantee in July 2000 to support Korean bond market conditions that were undermined by the currency crisis that started in the late 1990s. The main goal was to help restore the confidence of the market participants and to stabilise the disrupted Korean corporate bonds market.
← 6. SME Corporation Malaysia operates under the Ministry of Entrepreneur & Cooperatives Development (MECD). Further information is available on the website of SME Corp. Malaysia.
← 7. Alternatively, there are three CRAs that are specialised in providing credit ratings for SMEs and mid-tier companies. Notably, Credit Bureau Malaysia (CBM) is the country's main credit bureau that provides credit reporting and credit scoring services for both individuals and businesses. Their services include credit reports, credit scores, and credit monitoring. Also, CTOS Data Systems Sdn Bhd (CTOS) provides credit reports and credit scores for businesses of all sizes. They also offer other services such as business background checks, fraud prevention and risk management. Credit Scan Malaysia (Dun & Bradstreet) is a global provider of business information and credit ratings. Dun & Bradstreet offer a range of credit reporting and risk management services for SMEs and mid-tier companies, including credit reports, credit scores, and credit monitoring.
← 8. For detail see Regulation (CE) Nº. 1060/2009 of the European Parliament and of the Council on the credit rating agencies adopted in 2009, article 23, section I.
← 9. For details see Credit Rating Agency Reform Act, article 15E, sub paragraph c), section (2).
← 10. While out-of-court workouts or restructurings can occur in any jurisdiction, the nine jurisdictions mentioned here have incorporated provisions related to these systems into their legal or regulatory frameworks.