Moody’s: Covenant protections decline; manufacturing leads weakness

By Cristal Cody

Tupelo, Miss., Aug. 7 – Covenant protections for high-yield bond investors declined across all North American non-financial corporate sectors for the second consecutive quarterly period, Moody’s Investors Service said in a report on Thursday.

The average covenant quality score for the 12 months ended June 30 was 3.83, weaker than the 3.59 score for the previous 12 months, Moody’s said in the quarterly covenant quality sector report.

Moody’s rates the covenant quality of bonds on a five-point scale with 1.0 for the strongest investor protections and 5.0 for the weakest.

Manufacturing scores worst

Covenants in the manufacturing sector led the weakness, “driven by private equity-sponsored bonds issued by Gates Global LLC and Commscope, Inc.,” the report said.

The manufacturing sector received a 4.07 covenant quality score for the past 12 months.

Gates Global’s $1.3 billion offering of 6% senior notes due 2022 (Baa2/B/) priced on June 12 and received a 4.76 covenant quality score. Commscope’s $1.3 billion of senior notes (B2/B+/) priced on May 15 and received a 4.64 score.

“Overall, the manufacturing sector deteriorated most in the cash leakage, investments, leveraging and change-of-control categories,” the report said.

With a 3.99 covenant quality score, health care came in as the second weakest covenant quality sector due to a private equity-sponsored bond from Ortho-Clinical Diagnostics Inc., the report said.

Ortho-Clinical sold $1.3 billion of 6 5/8% senior notes due 2022 on May 8. They were rated a 4.47 covenant quality score.

Transportation tied with the health-care sector with a 3.99 score.

Moody’s cited United Continental Holdings, Inc.’s $300 million offering of 6% senior notes due 2020 (B2/B/) issued on Nov. 8, 2013 as one of the least protective bonds in the sector. The notes received a 4.73 covenant quality score.

Autos score best

Bonds in the automotive sector have offered the strongest covenant protections over the past year, Moody’s said.

Moody’s gave Pittsburgh Glass Works, LLC’s $360 million offering of 8% senior notes due 2018 (B3/B/), which was brought on Oct. 29, 2013, a 2.76 covenant quality score.

The automotive sector overall was rated a 3.52 covenant quality score.

Media and publishing was listed as the second top sector with investor protections and received a 3.59 covenant quality score.

Moody’s noted that Cenveo Corp.’s $540 million offering of 6% senior notes due 2019 (B3/B/) that priced on June 19 received a 2.41 covenant quality score.

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