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Announcement:

Moody's comments on Covenant-Lite Corporate Bond Trends from 2008 to June 2010

25 Aug 2010

New York, August 25, 2010 -- Moody's assessment of 440 bonds issued in the Americas and Europe from 2008 through June 2010 shows generally higher rates of "covenant-lite" protections for bonds rated at the higher end of the speculative-grade rating scale and more stringent packages for lower-rated instruments, said the ratings agency in a new report. However, the report also notes important exceptions, such as homebuilders, among others.

The covenant package of a conventional high-yield bond (rated Ba1 or lower at issuance) includes a restricted payments covenant and a debt incurrence covenant ("high-yield package"), the study stated. "Moody's considers the package covenant-lite if it lacks either or both covenants, which are the two most important forms of investor protection," said Alexander Dill, Moody's Vice President-Senior Covenant Officer.

The debt incurrence covenant limits a company's ability to increase leverage and the restricted payments covenant limits cash leakage from the covenant-restricted entities in the corporate family and investments in riskier assets, the report said. "These shareholder-friendly actions can erode the ability of issuers lower down in the rating spectrum to service their debt," noted Matthew Musicaro, an Associate Analyst at Moody's and the report's primary author.

Based on the sample assessment of 440 high yield bonds, Moody's observed that homebuilders, despite being one of the worst-performing sectors during the financial crisis, were far more likely to use a covenant lite ("investment grade") package than the rest of the market. Those companies that used light covenants generally had the cash and cash flow allowing them to negotiate relaxed loan covenants and thus had little incentive to agree to high-yield covenants to bondholders. Other than a few auto suppliers, no other sector followed the cov-lite trend, said Musicaro.

In addition, throughout the 2008-2010 period, 21% of Ba1 bonds, 56% of Ba2 bonds and 76% of Ba3 bonds used a high-yield package , while fallen angels consistently used an investment-grade package."Of the 28 fallen angels' bonds rated Ba1 or Ba2 at issuance in our sample for the 2008 -- 2010 period, 25 used an investment-grade package," noted Musicaro. "Only 23 of the 50 bonds issued by conventional high-yield issuers rated Ba1 and Ba2 used an investment-grade package."

Moody's found that that European high-yield issuers were more likely to have a debt incurrence covenant than issuers in the Americas. "Between January 1, 2008 and June 30, 2010, no European issuer in our population came to market with a bond rated Ba1 or lower without a debt incurrence covenant," said Musicaro. "In contrast, 5% of all bonds rated B1 or below in the Americas population did not have a debt incurrence covenant."

"We found a divide at the Ba3-B1 ratings threshold," Musicaro said. " Bonds that were rated B1 or below did not use an investment-grade package in 2008. However, some bonds rated B1 or below did so in 2009 and 2010."

The full report, "Covenant-Lite Trends In High-Yield Bonds Issued 2008 -- 2010," is available at www.moodys.com.

* * * * *

NOTE TO JOURNALISTS ONLY: For more information please contact New York Press Information +1-212-553-0376; EMEA Press Information in London +44-20-7772-5456; Juan Pablo Soriano in Madrid +34-91-310-1454; Alex Cataldo in Milan +39-02-914-81-100; Eric de Bodard in Paris +331-5330-1076; Detlef Scholz in Frankfurt +49-69-707-30-700; Mardig Haladjian in Limassol +357-25-586-586; Alex Sazhin in Moscow +7-495-228-60-60; Petr Vins in Prague +4202 2422 2929; Tokyo Press Information +813-5408-4110; Hilary Parkes in Toronto +1-416-214-1635; Hong Kong Press Information + 852-3758-1350; Hector Lim in Sydney +612 9270 8102; Luiz Tess in São Paulo +5511-3043-7300; Alberto Jones Tamayo in Mexico City +5255-1253-5700; Daniel Rúas in Buenos Aires +54 11-4816-2332 ext. 105; Craig Jamieson in Johannesburg +27-11-217-5470; Jehad el-Nakla in Dubai +971 4 401 9536; or visit our web site at www.moodys.com

New York
Matthew Musicaro
Associate Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Alexander Dill
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
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Moody's comments on Covenant-Lite Corporate Bond Trends from 2008 to June 2010
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