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Moody's: 12 Most-Active Private Equity Bond Sponsors Offer Weak Covenant Protections

Global Credit Research - 23 Apr 2013

New York, April 23, 2013 -- The 12 most-active private equity sponsors provide the weakest covenant protections, on average, according to a study by Moody's Investors Service of more than 200 high-yield bonds issued by sponsored North American companies. These weaker covenants leave creditors at greater risk of debt-funded dividend recapitalizations and subordination that could see them take losses in a default, the rating agency says in a new report.

"Of the 222 private equity-sponsored bonds we looked at, those issued by companies backed by the 12 most-active sponsors offered investors significantly less protection than those backed by less-active sponsors," says Matthew Musicaro, Associate Analyst and author of the report, "12 Most-Active Private Equity Sponsors Provide Weak Covenant Packages."

The bonds were drawn from Moody's High-Yield Covenant Database and were issued between 1 January 2011 and 28 February 2013. The database also includes covenant quality scores, which range from 1.0 for bonds that offer the strongest covenant protection, to 5.0 for those that offer the weakest protection.

The average covenant quality score of a bond backed by a top-12 sponsor was 3.75, Musicaro says, compared with 3.12 for bonds backed by less-active sponsors. Notably, bonds from less-frequent sponsors offered more covenant protection, on average, than bonds not backed by a private equity sponsor, which have an average score of 3.39. The 12 most-active private equity sponsors are classified as such because they each have at least six bonds issued by five distinct issuers in the covenant database and are the largest equity holder in at least one of these deals.

Bonds backed by a top-12 sponsor had weaker covenant scores across all six risk categories Moody's evaluates in its covenant analysis, with the biggest disparity in structural subordination. The average score for bonds backed by a top-12 sponsor was 3.32 in this risk category, some 43% lower than the 2.31 average for bonds without a top-12 sponsor.

"Heightened structural subordination and liens risk allow companies backed by a top-12 sponsor to incur more bank debt, which could reduce investor recoveries in a distressed scenario," Musicaro says. "Further, the combination of weak restricted payments and debt covenants make companies with a top-12 sponsor more susceptible to dividend recapitalizations, resulting in higher leverage and risk for investors."

Moody's recently launched Covenant Quality Index showed deteriorating overall covenant quality in North American bond issuance in the second half of 2012, but the covenant quality of bonds backed by the 12 most-active private equity sponsors deteriorated more in the fourth quarter than that of bonds without a sponsor, falling to a two-year low of 3.95, from 3.61 in the prior quarter. Most noteworthy, of bonds backed by top-12 sponsors, 73% received a "weakest" liens score and the average liens score declined to 4.34 in the fourth quarter, much weaker than the historical averages of 55% and 3.80, respectively.

Moody's research subscribers can access this report at http://www.moodys.com/research/Moodys-High-Yield-Covenant-Database-12-Most-Active-Private-Equity--PBC_152178.

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Alexander Dill
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Matthew James Musicaro
Associate Analyst
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's: 12 Most-Active Private Equity Bond Sponsors Offer Weak Covenant Protections
No Related Data.

 

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