Moody’s: North American high-yield bond covenant quality improves on light volume in January

By Cristal Cody

Tupelo, Miss., Feb. 9 – The covenant quality of North American high-yield bonds improved slightly in January, according to a Moody’s Investors Service report on Tuesday.

Moody’s covenant quality index, which is a three-month rolling average covenant quality score, strengthened to 4.3 in January from 4.32 in December.

Moody’s said, though, the levels continue to reflect weakest-level covenant protections. The index is 91 basis points weaker than its record best of 3.39 in April 2011.

In January, only six high-yield bonds cleared the market with an average covenant quality score of 4.02, up from 4.53 in December, according to the report, “North American Covenant Quality Index: Protection Improves in January Amid Tepid Issuance.”

Moody’s measures bond covenant quality on a five-point scale, with 1.0 for the strongest investor protections and 5.0 for the weakest.

“The strong month-to-month improvement reflects tepid issuance and the lack of any high-yield lite transactions in January,” Evan Friedman, Moody’s senior covenant officer, said in a release. “January was the first month since August 2011 without any high-yield lite bond transactions coming to market.”

There was no Caa or Ca bond issuance in January for the second consecutive month, reflecting investor reluctance to accept riskier credits, Moody’s said.

B-rated bonds made up four of the month’s deals or 67% of January’s issuance, up from 33% in December.

Of the month’s six full high-yield bond deals, the most protective investor protections came from TreeHouse Foods, Inc., GFL Environmental Inc. and Lamar Media Corp., Moody’s said.

TreeHouse Foods’ $775 million offering of 6% senior note due 2024 (Ba3/BB) priced on Jan. 21 received a covenant quality score of 3.43.

Moody’s gave GFL’s $300 million sale of 9 7/8% senior notes due 2021 (B3/B) brought to market on Jan. 26 a 3.71 score.

Lamar Media’s $510 million issuance of 5 3/8% senior notes due 2026 (Ba2/BB-/) priced on Jan. 7 received a 3.84 covenant quality score.

The weakest covenant package in January was from Pinnacle Foods Finance LLC, which received a 4.63 score, according to Moody’s.

Pinnacle Foods sold $350 million of 5 7/8% senior notes due 2024 (B2/B+) on Jan. 11.

The next weakest bond protection packages brought in January were from GCP Applied Technologies Inc., given a 4.39 covenant quality score, and Microsemi Corp., which received a 4.12 score.

GCP Applied Technologies sold $525 million of 9½% senior notes due 2023 (B1/B+) on Jan. 22.

Microsemi brought $450 million of 9 1/8% notes due 2023 (B2/B+) on Jan. 7.

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