Rite-Aid offers strongest covenants in June, TransDigm deal among weakest, Moody's reports

By Cristal Cody

Tupelo, Miss., July 10 - Covenant bond quality improved in June, with new bonds from Rite Aid Corp. and Quicksilver Resources Inc. providing the most protective full high-yield covenant packages over the month, according to Moody's Investors Service on Wednesday.

Moody's said its North American Covenant Quality index improved with the average covenant quality score at 3.73, compared with 3.99 in May. The index is based on a five-point scale with 1.0 providing the strongest investor protections and 5.0 the weakest.

Rite Aid's $810 million offering on June 18 of 6¾% senior notes due 2021 (Caa2/CCC) received the strongest covenant quality score of the month at 2.04. The notes priced at par to yield 6¾%.

Quicksilver Resources' $200 million offering of second-lien senior secured floating-rate notes due 2019 (B2/CCC+) that sold on June 10 received a covenant quality score of 3.04.

"June was characterized by substantially lower bond issuance due to concerns about increasing interest rates," Alexander Dill, head of Moody's covenant research, said in a statement. "Those issuers that went to market may have had to offer better terms to suddenly more discriminating investors, which was especially evident in lower-rated bonds, or those rated below Ba."

Some of the deals priced over the month with the weakest covenant protection included Quicksilver Resources' second tranche in the June 10 transaction, a $325 million offering of 11% senior notes due 2021 (Caa2/CCC). The notes received a covenant quality score of 4.03, Moody's said.

TransDigm Inc.'s $500 million offering of 7½% senior subordinated notes due 2021 (Caa1/CCC+) received one of the weakest covenant quality scores of the month at 4.50. The notes priced at par to yield 7½% on June 25.

SemGroup Corp.'s $300 million June 7 sale of 7½% senior notes due 2021 also offered weak covenant investor protection and received a covenant quality score of 4.27, Moody's said.

Moody's said the covenant index, which uses a three-month rolling average, ended June at 3.94, compared with 3.90 in May.

Bonds rated Caa or Ca at issuance had an average covenant quality score of 3.59 in June, better than 3.92 in May and 3.69 in April.

Single B-rated bonds had an average score of 3.72 in June, compared with 3.92 in May.

Ba-rated bonds, which typically have weaker covenant packages, had an average covenant quality of 3.91 in June, compared with 4.27 in May, Moody's said.

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