Moody's says covenant quality of high-yield bonds slips in April

By Cristal Cody

Tupelo, Miss., May 14 - The covenant quality of North American high-yield bonds slipped in April after improving in March from February's record low, according to Moody's Investors Service on Wednesday.

The average covenant quality score weakened to 4.19 in April from 4.13 in March after hitting 4.36 in February, Moody's said in the report, "Bond Covenant Quality Dips in April After a Rebound in March."

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.

"Monthly covenant quality has shown no definitive trend since reaching 3.84 in January," Alexander Dill, head of Moody's covenant research, said in a release. "But the covenant quality of bonds rated B and Caa or Ca materially declined in April, while issuance of Ba rated bonds, which typically receive the lowest scores, was anemic."

The average covenant quality score for new bonds rated Caa or Ca - which accounted for 39% of April issuance, compared with 13% in March - worsened to 4.34 in April from 3.93 the prior month, Dill said.

"Covenant quality of single B bonds, the sweet spot in the high-yield market, worsened materially to 3.98 from 3.87 in March, moving further away from the 3.66 historical average," according to the report.

Single B bonds made up 54% of April issuance, up from 48% in March and the long-term average of 50%.

Crown Castle rates best

Over the month of April, the most protective full covenant packages came from Crown Castle International Corp., Florida East Coast Holdings Corp. and FTS International Inc., Moody's said.

Houston-based Crown Castle sold $850 million of 4 7/8% senior notes due 2022 (B1/BB-/) on April 1 at 99.5 to yield 4.951%. The covenant package on the bonds was rated 3.03 by Moody's.

Jacksonville, Fla.-based Florida East Coast Holdings priced $875 million of 6¾% senior secured notes due 2019 (B3/B/) on April 15 at par. Moody's gave the issue's covenant package a 3.16 covenant quality score.

Fort Worth, Texas-based FTS International brought $500 million of 6¼% senior secured notes due 2022 (B2/B-/) on April 11 at par. The bond covenant package was rated 3.31 by Moody's.

Athlon rates worst

The weakest bond covenant packages in April were from Athlon Energy Inc., Air Canada and Quad/Graphics Inc., according to the report.

Athlon Holdings LP and Athlon Finance Corp. sold $650 million of 6% senior notes due 2022 (B3/CCC+/) on April 16 at par. Moody's gave the Fort Worth, Texas-based oil and gas company's issue a 4.74 covenant quality score.

Quebec-based Air Canada sold $400 million of 7¾% senior notes due 2021 (Caa2/B-/B-) at par on April 10. Moody's gave the bonds a covenant quality score of 4.51.

Sussex, Wis.-based Quad/Graphics priced $300 million of 7% senior notes due 2022 (B1/B/) at par on April 11. The bonds were given a 4.5 covenant quality score.

On a three-month rolling average basis, the spread to benchmark for new bond issuance widened in April, while covenant quality continued to weaken materially, according to Moody's.

"This somewhat reverses the overall trend in recent months of spread compression alongside declining covenant quality," Dill said. "While this suggests investors are getting more premium for poor protection, with covenant quality still near record lows, the amount of spread continues to reflect a disconnect between protections and risk."

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