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Global Credit Research - 12 Feb 2013
New York, February 12, 2013 -- The covenant quality of North American high-yield bonds continued
to slide in January, Moody's Investors Service says in its
second monthly report on its recently launched Covenant Quality Index
(CQI). The index shows that covenant quality began to erode last
July, at the same time that high-yield bond issuance started
"Our three-month rolling average CQI deteriorated to 3.89
in January from 3.79 in December," says Alexander Dill,
Head of Covenant Research at Moody's and author of "Bond Covenant
Quality Resumes Slide." "The single-month score
for January was 4.08, a marked deterioration from 3.55
in December and the previous low of 4.06 in November."
The CQI uses a five-point scale, with 1.0 representing
the strongest covenant protections and 5.0, the weakest.
It peaked at 3.40 last July.
But investors are not being compensated for accepting weaker covenants,
Dill says. "While investors are taking on more covenant risk,
average spreads to benchmark yields have tightened, fueled by strong
demand and a record volume of issuance." Indeed, the
average benchmark spread of bonds in Moody's High-Yield Covenant
issued since October is close to the level seen in the first half of 2011,
though the CQI shows much weaker covenants.
Last month's decline can be explained largely by an increase in
high-yield-lite issuance. High-yield lite
covenant packages, which lack a restricted payments and/or a debt-incurrence
covenant, accounted for 34.6% of issuance in January,
compared with 3.2% in December. Continuing a recent
trend to convert to high-yield lite from full high-yield
covenant packages, Netflix, Lear and Crown Americas all issued
bonds with high-yield lite packages last month.
January also saw a higher percentage of bonds rated Ba, which generally
have high-yield-lite covenant packages or full covenant
packages with low covenant quality. These accounted for 58%
of issuance in January, compared with the average of 27%
since Moody's began tracking the CQI in January 2011.
Moody's research subscribers can access this report at http://www.moodys.com/research/North-American-Covenant-Quality-Index-Bond-Covenant-Quality-Resumes-Slide--PBC_149862.
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VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
Corporate Finance Group
Moody's: High-Yield Bond Covenant Protections Hit New Low in January
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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