Moody's: Covenant quality of high-yield bonds hits new low in February

By Cristal Cody

Tupelo, Miss., March 12 - Weak scores for bonds rated single B and a large percentage of high-yield-light bonds sent North American high-yield bond covenant quality to a record low in February, Moody's Investors Service said in a report on Wednesday.

The average covenant quality score dropped to 4.36 in February from 3.84 in January, Moody's said in the report, "Bond Covenant Quality Hits Record Low, Reversing Gains of the Past Three Months."

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.

"February's score was the lowest since we began tracking North American high-yield bond covenant quality in January 2011," Evan Friedman, Moody's senior covenant officer, said in a release. "The average monthly score had improved from the prior record low of 4.26, set in October, although issuance in the past three months has been about half the level that accompanied the deterioration last autumn, making it difficult to draw a firm conclusion from the last month's weakness."

The covenant quality of single B bonds, which made up 56% of February's corporate issuance, fell to 4.24 from 3.77 in January, according to the report.

High-yield-light bonds represented 39% of February's issuance, near the 41.7% record set in September 2011 and a significant increase from 10% in January, Moody's said.

"These bonds lack a debt incurrence and/or a restricted payments covenant and automatically receive our weakest score of 5.0," Friedman said.

The average covenant quality score for bonds rated Ba weakened to 4.58 in February from a below-average 4.43 in January, according to Moody's. Ba-rated bonds accounted for 33% of issuance in February, in line with the average of 28%.

The average covenant quality score for new Caa-rated bonds fell to 4.29, compared to 3.63 in January and 4.39 in December, the report said. Caa bonds accounted for 11% of last month's issuance.

Greektown strongest

The most protective full high-yield package in February came from Greektown Holdings, LLC/Greektown Mothership Corp., Moody's said.

The Detroit-based gaming, lodging and dining company's $425 million 8 7/8% second-priority senior secured notes due 2019 (B3/B-/) priced through Greektown Casino-Hotel on Feb. 26 received a covenant quality score of 2.35.

Other deals with strong investor protections brought over the month included Oak Brook, Ill.-based food manufacturer TreeHouse Foods, Inc.'s $400 million offering on Feb. 25 of 4 7/8% senior notes due 2022 (Ba2/BB/), which received a 3.37 rating.

Cleveland-based American Greetings Corp. parent Century Intermediate Holding Co. 2's $285 million 9¾% senior PIK toggle notes due 2019 (B3/B-/) priced on Feb. 5 and received the month's third-strongest covenant quality rating of 3.68.

Chuck E. Cheese weakest

February's weakest full high-yield bond package came from the Irving, Texas-based operator and franchiser of the Chuck E. Cheese dining and entertainment restaurant chain, Moody's said.

Apollo Global Management, LLC affiliate Q Merger Sub Inc., which acquired CEC Entertainment Inc. in February, priced $255 million of 8% senior notes due 2022 (Caa1/CCC+/) on Feb. 14. Moody's gave the deal a 4.54 covenant quality score.

Other weak bond packages included Knoxville, Tenn.-based movie theater operator Regal Entertainment Group's $775 million offering on Feb. 25 of 5¾% senior notes due 2022 (B3//B-), which Moody's rated 4.51, and Atlanta-based movie exhibitor AMC Entertainment Inc.'s $375 million sale on Feb. 4 of 5 7/8% senior subordinated notes due 2022 (B3/B-/), which received a 4.43 covenant quality score.

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