Debt covenants and credit spread valuation: the special case of Chinese global bonds
thesisposted on 28.03.2022, 18:25 by Tat Sean Chang
The research looks to enrich the existing covenant and bond literatures by studying the impact of bond covenants on Chinese global bond valuation and the self-insight of analysts. Building on prior literatures, this thesis identifies four risk pricing factors that bond covenants protect against. They are information asymmetry, agency problems, financial distress and bankruptcy. These are tested using a mixed methods approach that incorporates surveys and interviews. Data is collected from bank and investment analysts representative of the market. The results reveal important and statistically significant relationships between Chinese global bond valuation and the four risk pricing factors. The findings indicate that covenants have significant main and interactive effects on bond valuation. In particular, bankruptcy is identified as the most significant factor in main effects and two-factor interactive effects. This is followed by agency problems, financial distress and information asymmetry. Also of note is the greater effect size of two-factor interactive effects against three-factor interactive effects. Self-insight is measured using relative factor weights chosen by analysts in a subjective weight and analyst scores model. The results indicate that analysts have limited self-insight. Overall, the research reveals that credit analysts consider bankruptcy the ultimate risk and the greatest threat to valuation, hence protection against it most important. Protection is beneficial up to a certain level, after which, it becomes overly restrictive and detrimental to valuation. A balanced approach to covenants must be established to prevent covenant protection overlap. Limited self-insight of analysts suggests clear investment guidelines may improve performance.