Strength of Bond Covenants and Bond Assessment Framework
27 Pages Posted: 20 Aug 2010
Date Written: August 9, 2010
We examine bond covenants of 29 New Zealand bond issues prior to the 2008 securities market act. Results from the study indicate that protection provided for bondholders is weak and limited. On average, only 2-3 types of covenants are embedded with the issues and only 27% of these covenants provide full protection to the bondholders. However, bondholders are not compensated for holding the additional risk. We propose an alternative bond protection assessment framework that directly assesses the level of protections, restrictive covenants provide to bond holders. We calculate the covenant quality score for the issuers and group them into a weak or strong bond. Recent legislative changes will go some way towards improving the investor protection and confidence, but yet to be seen. This proposed scoring framework can be used by potential investors to complement the traditional credit ratings when assessing their investment decisions.
Keywords: Government Policy and Regulation, Bond Covenants, Bondholder protection
JEL Classification: G18, G31, G33
Suggested Citation: Suggested Citation