High-yield bond covenant quality improves in December, Moody's says

By Cristal Cody

Tupelo, Miss., Jan. 15 - Although covenant quality remains near record lows, the covenant quality of North American high-yield bonds improved for the second consecutive month in December on light issuance, according to Moody's Investors Service on Wednesday.

The average covenant quality score improved to 4.00 in December from 4.18 in November and the record low of 4.26 in October, Moody's said in the report, "Bond Covenant Quality Notches Second Consecutive Monthly Gain."

Moody's rates the covenant quality of junk bonds on a scale of one to five with one representing the strongest investor protection and five representing the weakest.

"Although investor compensation appears to be reflecting greater covenant protection, right now it is premature to attribute this effect to the data, given that covenant quality is still near record lows," Alexander Dill, head of covenant quality research at Moody's, said in a release.

Only 18 bonds were issued in December, Moody's noted in the report.

"December's improvement was driven by strengthening covenants for bonds rated Ba and single B at issuance," Dill said. "The average CQ score for Ba rated bonds improved markedly, to 3.69 from 4.51 in November, and they accounted for 22% of December issuance, while the score for B rated bonds improved to 4.01 from 4.11, and they accounted for 61% of issuance."

The covenant quality of bonds rated Caa or Ca worsened in December to 4.39 from 3.70 in November, Dill said. Caa and Ca bonds accounted for 17% of December issuance, compared with the historical average of 22% of issuance.

Uranium One scores best

Uranium One Investments Inc. brought the most protective high-yield bond covenant package in December, and the issue was given a covenant quality score of 2.80, according to the report. The Toronto-based uranium mining company sold $300 million of 6¼% senior secured notes due 2018 (Ba3/B+/BB-) on Dec. 6 at 98.847 to yield 6½%.

Other issues with strong investor protection packages in December included Memorial Resource Development LLC's $350 million offering of 10%/10¾% senior PIK toggle notes due 2018 (B3/B-/), which Moody's gave a covenant quality score of 2.94.

"A single PIK offering in December contributed unusually to strengthening covenant quality in December," according to the report. "The PIK note from Memorial Resource Development, an oil and gas independent, at 2.94 (moderate protection), is quite protective by PIK standards."

Memorial Resource Development, a Houston-based upstream master limited partnership focused on the acquisition, production and development of oil and gas properties in the United States, sold $350 million of the PIK toggle notes on Dec. 13 at 98 to yield 10.524%.

CTP Transportation Products, LLC's offering of 8¼% senior secured notes due 2019 (B2/B+/) also scored strong and were given a 3.06 covenant quality score, according to Moody's.

CTP Transportation Products and CTP Finance Inc. sold $250 million of the notes on Dec. 13 at par. CTP Transportation is a Franklin, Tenn.-based supplier of industrial belts, specialty tires and wheels.

Michaels scores worst

The weakest full high-yield package came from Michaels Stores, Inc., according to Moody's.

Michaels Stores, an Irving, Texas-based specialty retailer, sold $260 million of senior subordinated notes due 2020 (Caa1/CCC+/) on Dec. 16 at par to yield 5 7/8%. Moody's rated the covenant quality on the issue at 4.98.

Other weak covenant packages brought in December included deals from Prestige Brands, Inc. and Churchill Downs Inc., according to the report.

Moody's gave Prestige Brands' 5 3/8% senior notes due 2021 (/B2/B+/) a 4.66 score. Prestige Brands, a Tarrytown, N.Y.-based distributor of branded health-care and household products, priced $400 million of the notes at par on Dec. 3.

Churchill Downs' 5 3/8% senior notes due 2021 (B1/BB/) scored 4.58, Moody's said. The Louisville, Ky.-based horse racing track operator sold $300 million of the notes on Dec. 11 at par.

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