Junk bond covenant quality hits record low on heavy issuance; Canadian covenants better

By Cristal Cody

Tupelo, Miss., Oct. 9 - U.S. high-yield bond covenant quality set a record low as issuance hit a record high in September, according to a report on Wednesday from Moody's Investors Service.

"High-yield bond issuance of $49.2 billion in September topped the previous record of $46.6 billion, set in May," Alexander Dill, head of Moody's covenant research, said in a statement. "After the Fed's decision to postpone tapering last month, companies may be seeking a last chance to restructure their balance sheets."

The report, "Bond Covenant Quality Hits Record Low," said that bond covenant quality deteriorated across all rating categories. Moody's measures covenant quality on a five-point scale, with 1.0 as the strongest investor protections and 5.0 as the weakest.

The index, which uses a three-month rolling average, ended September at 4.05, compared with 3.85 in August.

"Bonds from Hilton Worldwide Finance, LLC, with a score of 4.44, and PRA Holdings Inc. and Ancestry.com Holdings LLC, both at 4.40, had the weakest investor protections among September's full high-yield bond packages," Moody's said.

The average covenant quality score for bonds rated Ba at issuance was 4.52 in September, compared with 4.24 in August, the agency said.

B-rated bonds had an average score of 4.13 in September, compared with 4.01 in August. Caa- or Ca-rated notes had an average score of 3.98 last month, weaker than August's reading of 3.49, according to the report.

The most protective full high-yield bond packages issued in September came from Caesars Entertainment Resort Properties, LLC, which was rated a covenant quality score of 3.04, followed by Diamondback Energy, Inc., at 3.12 and BI-LO Holding Finance, LLC, at 3.21, Moody's said.

Meanwhile, Canadian high-yield bonds continue to offer better covenant protection than U.S. bonds, though the quality has weakened over the past 12 months, Moody's said in a separate release on Wednesday. Canadian covenant quality remains weaker than those for European, Asian and Latin American high-yield bonds, the agency said.

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