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Moody's launches high-yield bond Covenant Quality index
By Angela McDaniels
Tacoma, Wash., Jan. 8 - Moody's Investors Service launched a new index, the Covenant Quality index, to track the protection that U.S. and Canadian high-yield bond covenants offer to investors, according to an agency news release.
"Investors can use the Covenant Quality index to track changes in overall covenant quality over time and through market cycles. They can also use it to put current covenant trends and specific deals in historical perspective," Alexander Dill, head of covenant research at Moody's, said in the release.
The index aggregates Moody's assessments of the covenant quality of individual bonds at issuance and is based on Moody's Covenant Quality Scores, which assess the degree of protection that a covenant package provides investors.
Moody's evaluates covenants on a five-point scale ranging from CQ1 for packages with strong protection to CQ5 for those with the weakest protection. In turn, the high point on the Covenant Quality index of CQ1 indicates that covenant packages are collectively providing strong protection. As investor protection weakens, the index would move toward CQ5.
The agency said the index most recently was at 3.84, indicating weak covenant quality. Its high point was 3.39 in April 2011, and the low point was 3.93 in November 2011. In November 2012, it nearly matched the low point with a reading of 3.90.
Moody's has calculated the index back to January 2011. The two-year historical average is 3.65.
The agency noted that investors can use the index to gauge the covenant quality of an individual bond against the prevailing market norm. For example, if Moody's assigns a Covenant Quality Score of 1.5 to a covenant package at a time when the Covenant Quality index is at 3.2, an investor would see that the package provides more protection than average.
The index is calculated monthly and provides a three-month rolling average of Covenant Quality Scores. It will be published monthly.
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