Moody’s says high-yield bond covenant quality edges lowers in June

By Cristal Cody

Tupelo, Miss., July 9 –The covenant quality of North American high-yield bonds declined modestly to 4.1 in June from 4.07 in May, according to Moody’s Investors Service on Wednesday.

Moody’s rates covenant packages on a five-point scale with 1.0 as the strongest investor protections and 5.0 as the weakest

Covenant quality in June worsened for new Ba-rated bonds and Caa/C-rated bonds but improved for single B issuance, Moody’s said in a report titled "Bond Covenant Quality Dips Slightly in June After Improving in May.”

“Since January, scores for 2014 have not shown any definitive trend,” Alexander Dill, head of Moody’s covenant research, said in an agency news release.

B-rated bonds improved to a covenant quality score of 3.96 in June from 4.04 in May, according to the report. Single B bonds comprised 58% of issuance in June, up from 47% in May.

Bonds rated Ba in June averaged a covenant quality score of 4.26, weaker than the average score of 4.15 in May, Moody’s said. Ba-rated bonds accounted for 28% of issuance in June, down from 35% in May, according to the report.

The average covenant quality score for new bonds rated Caa/Ca worsened to 4.35 in June from 4.00 in May, Moody’s said. Caa bonds accounted for 14% of issuance in the past month, less than the 18% share in May.

Cenveo strongest

The month saw the most protective full high-yield covenant bond packages from Cenveo Corp., Altegrity, Inc. and Outerwall Inc., Moody’s said.

Moody’s gave Cenveo’s June 19 offering of $540 million of 6% senior priority secured notes due 2019 (B3/B/) a 2.41 covenant quality score. Moody’s did not give a covenant quality score for the Stamford, Conn.-based print products company’s $250 million tranche of junior notes priced in June.

The deal from Altegrity, a Falls Church, Va.-based risk and information services company, received a 2.57 covenant quality score. Altegrity sold $825 million of 9½% first-lien senior secured notes due 2019 (B3/B-/) on June 30.

Outerwall’s transaction received a 2.85 score. The Bellevue, Wash.-based owner of Redbox kiosks sold $300 million of 5 7/8% senior notes due 2021 (Ba3//BB-/) on June 4.

Gates weakest

In June, Gates Global LLC brought the weakest covenant bond package, Moody’s said.

Moody’s gave Gates’ bonds (Caa2/B/) a covenant quality score of 4.76.

The company, a subsidiary of Denver-based Gates Corp., an automotive and industrial products manufacturer, sold €235 million of 5¾% senior notes due 2022 and $1.04 billion of 6% senor notes due 2022 on June 12.

New issues from West Corp. and Hillman Group Inc. also received weak covenant quality scores, according to the report.

The $1 billion offering of 5 3/8% senior notes due 2022 (B3/B+/) that West, an Omaha-based technology-driven communications service provider, priced on June 18 received a 4.74 score.

Moody’s gave Cincinnati-based hardware supplier Hillman’s offering a covenant quality score of 4.61. Hillman sold $330 million of 6 3/8% senior notes due 2022 (Caa2/CCC+/) on June 12.

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