Bond covenants 'loose' under heavy primary action; demand undeterred by poor terms

By Cristal Cody

Prospect News, Aug. 21 - A glut of new deals may be behind weaker bond covenants for issues in the high-yield chemical sector, according to market sources.

Tronox Finance LLC's offering of $900 million of eight-year senior notes sold the previous week highlighted the trend from the past few months.

Tronox Finance's issue had significant covenant flaws, according to research reports from Moody's Investors Service and Covenant Review, an independent credit research firm.

Other recent debt issuers, such as Ashland Inc. and LyondellBasell Industries NV, also had weaker bond covenants.

"There recently have been a lot of chemical companies coming to market and their covenant scores have been generally weaker," Michael Tsai, associate analyst at Moody's, said on Tuesday in an interview.

Different rationales could explain the trend, he said.

"As of right now, investors need to be looking for any type of yield, and all these issuers that are coming to market are issuing much lower coupons than they would have six months ago," Tsai said.

"You could blame it on there not being much opportunity elsewhere with long-term yields paying so low. But, definitely, investors are snatching up what's coming to market."

In fact, the weaker covenants are not deterring investors, an investment manager said on Tuesday.

"It's indicative of pretty strong demand," he said. "The Unisys deal, they did it with investment-grade covenants, which is to say almost none. They got the deal done for sure."

Unisys Corp., a Blue Bell, Pa.-based software and technology company, sold $210 million of five-year senior notes (B2/BB-/) at par to yield 6¼% on Thursday.

Higher-rated debt often features weaker covenants and lower-rated debt typically provides a stricter covenant package, bond sources said.

"How tight covenants are are a function of supply and demand," Chris Chaice, an analyst for Covenant Review, an independent credit research firm, told Prospect News.

"If there's a lot of demand to buy bonds, issuers get loose terms. If the bond is going to trade up at the break, they could always just sell it if they don't want exposure from weak covenants."

In fact, the recent deals from the chemical issuers are trading modestly higher, a bond source said on Tuesday.

In the secondary market, Tronox Finance's new 6 3/8% notes due 2020 (B1/BB-/) traded better at 100.625 bid, 100.875 offered on Tuesday, a source said.

The Stamford, Conn.-based producer and marketer of titanium dioxide pigment sold the notes at par on Aug. 15.

Ashland's 4¾% senior notes due 2022 also traded higher on Tuesday at 100.75 bid, 101.75 offered, a source said.

Ashland, a Covington, Ky.-based specialty chemical company, sold $500 million of the 10-year notes (Ba2/BB-/) at par on Aug. 2.

"The amount of bonds being issued right now suggests the market is very, very hot, especially for the second half of August," Chaice said.

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