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Moody's: Covenants of Low-Rated Bonds Weaken Significantly in May

Global Credit Research - 12 Jun 2013

New York, June 12, 2013 -- Moody's North American High-Yield Covenant Quality Index remained near its record low in May, the rating agency says in a new report, "Bond Covenant Quality Remains Weak in May." Although the three-month rolling average ticked up slightly last month, to 3.90 from 3.94 in April, it has declined in seven of the 10 months since peaking at 3.41 last July. Moody's measures covenant quality on a five-point scale, with 1.0 denoting the strongest investor protections and 5.0, the weakest.

"Both the three-month rolling average and single-month scores improved slightly last month, but May was still the fifth-worth month in terms of covenant quality of the past year," says Moody's Head of Covenant Research, Alexander Dill. "Two contrary forces were at play in May. Though the percentage of Ba rated bonds, which generally have worse quality, fell to 21% from a record high of 41% in April, the covenant quality of bonds rated lower materially worsened."

Bonds further down the rating scale usually have stronger covenant packages because investors expect weaker credits to provide more protection. Bonds rated Caa/Ca and single B at issuance had the same average 3.92 score in May compared with 3.69 for Caa rated bonds and 3.66 for single B bonds, respectively, in April, while Ba rated bonds boosted the overall covenant quality average, scoring 4.27 in May compared with 4.48 in April.

Neither the slight improvement in covenant quality nor the preponderance of low-rated bonds with weaker covenant quality narrowed the average spread to benchmark in May. "Spreads remain stable," Dill says, "even while investors assume more risk to own higher-yielding instruments."

Among bonds offering the strongest investor protections in May were those from Magnetation LLC, which scored 2.07 and Ahern Rentals Inc., which scored 2.09. Bonds from CommScope Holding Company Inc., at 4.79; US Airways Group, Inc., 4.74; and United Continental Holdings Inc., 4.73, offered the weakest protections among bonds with full high-yield packages.

High-yield lite issuance was relatively low last month, helping prop up the overall covenant quality score. High-yield lite bonds accounted for 20.5% of issuance in May, compared with 22.2% in April and came from several sectors, including paper, packaging and forest products; healthcare; wholesale power; and retail and business products.

Moody's research subscribers can access this report at http://www.moodys.com/research/North-American-Covenant-Quality-Index-Bond-Covenant-Quality-Remains-Weak--PBC_154991.

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

Tom Marshella
MD-US and Amer Corporate Fin
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's: Covenants of Low-Rated Bonds Weaken Significantly in May
No Related Data.

 

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