Fewer bondholder protections seen in new deals from CNH, Aleris; demand remains high

By Cristal Cody

Tupelo, Miss., Oct. 19 - Most of the new high-yield bond deals sold over the week held significant covenant concerns, a trend often seen when issuance remains strong, according to bond sources.

Investors pushed aside any concerns and several deals were upsized, such as CNH Capital LLC's $750 million three-year senior notes (Ba2/BB) that priced at par to yield 3 7/8% on Tuesday. The deal was upsized from $500 million.

"It goes through cycles, but the general trend has been, unfortunately, for fewer bondholder protections," Alex Diaz-Matos, an analyst at Covenant Review, an independent credit research firm, said on Friday.

"CNH did not have the type of bondholder protection that high-yield buyers would normally expect," he said.

The company, a subsidiary of Burr Ridge, Ill.-based agricultural and construction equipment company CNH Global NV, followed the same covenants it used for its issuance of $500 million of 6.25% senior notes due 2016 that priced on Nov. 1, 2011, Diaz-Matos said.

"CNH sold bonds with similar covenants in November last year," he said. "If an issuer is able to sell bonds with comparably weak covenants once, they can often get away with it again unless there's some type of market change."

According to the agency, some of the covenant concerns with CNH's new notes due 2015 include that it came with investment-grade style covenants and the notes are subject to significant structural subordination, as non-guarantors represent the significant majority of the company's revenues and assets.

In addition, the deal's change-of-control provision is "unusually drafted, with an off-market ratings condition, and contains a significant loophole that may deprive bondholders of a put right in situations where they would expect to receive one," Diaz-Matos said in a report analyzing the issue's covenants.

Other new issues sold over the week also contained covenant flaws, according to Moody's Investors Service and Covenant Review, including the $500 million of senior notes due 2020 (B3/B) from IMS Health Inc. and aluminum products producer Aleris International, Inc.'s high-yield offering.

Aleris upsized its deal from $400 million and sold $500 million of 7 7/8% senior notes due 2020 (B2/B) at par on Thursday.

The company, like CNH Capital, also issued with similar restrictive covenants its previous issue of 7.625% senior notes due 2018, Covenant Review said.

The company held a roadshow for the offering and came back later with proposed changes to the restricted payments covenant, Anthony P. Canale, an analyst at Covenant Review, said in a report.

The notes initially were "being marketed with the 103% call option that is off market for secured deals and wildly off-market for unsecured deals such as this one," Canale said.

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