Low-rated high-yield bond covenants weaken in May, Moody's reports

By Cristal Cody

Tupelo, Miss., June 12 - Bonds rated below Ba priced with weaker covenants in May, according to a Moody's Investors Service report on Wednesday.

"Covenant quality of lower-rated bonds declined markedly in May," Moody's said in its high-yield covenant quality report for May. The report rates covenant quality on a scale of 1 with the strongest investor protections and 5 with the weakest.

"Bonds rated Caa/Ca at issuance had an average CQ score of 3.92, weaker than 3.69 in April and 3.55 in March," the report said. "Single B rated bonds also had an average score of 3.92 in May, weaker than the 3.66 average in April."

Bonds rated Ba, which typically have weaker covenant packages, comprised only 21% of high-yield bonds issued in May, below April's record high of 41% and the historical average of 27%, Moody's said.

"This should have led to a solid increase in covenant quality in May," according to the report. "Covenant quality might have been even worse in May but for an improvement in the average CQ score of Ba rated bonds to 4.27 from 4.48 in April."

Magnetation LLC, with a covenant quality score of 2.07, and Ahern Rentals, Inc., at 2.09, offered the strongest full high-yield covenant packages of bonds sold in May, Moody's said.

Magnetation and Mag Finance Corp. sold $325 million of restructured senior notes due 2018 (B3/B-/) at par to yield 11% on May 15.

Ahern Rentals priced $420 million of second-priority senior secured notes due 2018 (Caa1) at par to yield 9½% on May 31.

The $550 million issue of 6 5/8% senior PIK toggle notes due 2020 (Caa1/B-/) that CommScope Holding Co., Inc. priced at par on May 22 received a 4.79 covenant quality score, the weakest covenant protection in new deals for the month, according to Moody's.

U.S. Airways Group, Inc.'s $500 million issue of 6.125% senior notes due 2018, which received a 4.74 covenant quality score, and United Continental Holdings Inc.'s $300 million offering of 6.325% senior notes due 2018, which received a 4.73 score, also offered the weakest covenant protection of deals priced in May, the report said.

The covenant quality index remained near its record low in May, Moody's said.

Overall, covenant quality improved slightly in May with an average covenant quality score of 3.99, slightly better than 4.00 for April's bond issuance but worse than the 3.76 score in March, Moody's said.

"Both the three-month rolling average and single-month scores improved slightly last month, but May was still the fifth-worst month in terms of covenant quality of the past year," Alexander Dill, Moody's head of covenant research, said in a release.

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