Japan Pushes for Greater Use of Protections on Corporate Bonds

Japan expects corporate bond issuers to start adding investor protection as it pushes the use of covenants, opening the way for lower-rated companies to enter the debt market. 

A working group led by the Japan Securities Dealers Association finished a series of monthly meetings in June that discussed details of applying covenants to local corporate notes with lower ratings. 

The group agreed on applying Change of Control clauses and reporting covenants on bonds of BBB and lower, while keeping conditions flexible, according to an official at JSDA. The former clauses protect investors when there’s a shift in company ownership, while the latter oblige issuers to notify investors when the likelihood of default rises. 

The discussion of covenants in the Japanese credit market resurfaced after investors became frustrated with a lack of protection on a debt default by hotel chain Unizo Holdings last year. JSDA’s goal is to first apply covenants on lower rated companies in order to encourage them to sell bonds, diversifying the market and providing a wider range of investment opportunities.

“We want to lower the bar for investors to buy bonds from lower rated companies by providing covenants,” Yoshiko Nishimura, senior general manager of the bonds and financial products division at JSDA, said in an interview with Bloomberg on Thursday. While Nishimura said that she hopes all lower rated companies to carry such covenants, “there are some flexible measures that can be taken,” she said.

While the securities association would like to see all bonds rated BBB and below have Change of Control clauses, there may be exceptions, she said. For instance, if the investor is protected in a different way such as providing a debt administrator or giving collateral in place of Change of Control, the notes may not necessarily need to have that clause, Nishimura added.

JSDA will compile and announce a report later this month, and working groups consisting of underwriters will further discuss details from September onward, she said.

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