Covenant quality weakens in July to monthly record low, Moody’s says

By Cristal Cody

Tupelo, Miss., Aug. 12 – The covenant quality of North American high-yield bonds continued to weaken in July and remains at its weakest level on record, according to Moody’s Investors Service.

Moody’s covenant quality index, which is a three-month rolling average score weighted by each month's issuance volume, weakened to 4.37 in July from 4.25 in June.

In addition, the average monthly covenant quality score deteriorated to 4.6 in July, the weakest monthly score since 2011, according to the report, “Protection Remains at Weakest Level as Worsening Trend Continues in July.”

Moody's measures bond covenant quality on a five-point scale with 1 for the strongest investor protections and 5 for the weakest.

“With only 16 issuances in July, the monthly score was dictated by the high percentage of high-yield lite transactions,” Moody’s said in the report.

High-yield lite bonds automatically receive the weakest possible score of 5 because they lack debt incurrence and/or restricted payments covenants.

“This trend of weak covenant protections continues to reflect a large percentage [of] high-yield lite transactions,” Evan Friedman, Moody’s senior credit officer, said in a release. “Investors are trading away their protections in search of yield.”

Eldorado Resorts scores best

The most protective full high-yield packages priced in July came from Eldorado Resorts Inc., which Moody’s scored 3.18, followed by Euramax International Inc., at 3.37, and TerraForm Global Operating LLC, at 3.73.

Eldorado Resorts sold $375 million of senior notes due 2023 (Caa1/B-) at par to yield 7% on July 16.

Euramax priced $385 million of senior secured notes due 2020 (Caa2/B-) at par to yield 12% on July 30.

TerraForm was in the market on July 31 with $810 million of green-eligible 9¾% senior notes due 2022 (B2/B+) priced at 98.753 to yield 10%.

Kenan scores worst

The full high-yield package from Kenan Advantage Group Inc. was the weakest in July with a covenant quality score of 4.73, followed by Sunoco LP, with a 4.67 score, and Builders FirstSource Inc., at 4.59, Moody’s said.

Kenan Advantage Group priced $405 million of senior notes due 2023 (B3/B-) at par to yield 7 7/8% on July 23.

Sunoco sold $600 million of senior notes due 2020 (Ba3/BB/BB) at par to yield 5½% on July 15.

Builders FirstSource brought to market a $700 million offering of senior notes due (Caa2/B-) at par to yield 10¾% on July 24.

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