Moody's: High-yield bond covenant quality improves slightly in May

By Cristal Cody

Tupelo, Miss., June 11 – The covenant quality of North American high-yield bonds improved in May after slipping in April, Moody’s Investors Service said in a report on Wednesday.

The average covenant quality score improved to 4.07 in May from 4.19 in April and 4.13 in March, according to the report, “Bond Covenant Quality Improves in May After a Decline in April.”

Moody’s rates the covenant quality of bonds on a five-point scale with 1.0 for the strongest investor protections and 5.0 for the weakest.

“Last month's score reflects a material improvement in the covenant quality of both Ba rated and Caa/Ca rated bonds,” Moody’s senior covenant officer Evan M. Friedman said in a release. “The covenant quality single B rated bonds, the sweet spot in the high-yield market, weakened marginally over the same period.”

The average covenant quality score for bonds rated Ba was 4.15 in May, compared with 5.00 in April and a historical average of 4.30, Friedman said.

Issuance of Ba rated bonds increased in May to 35% of the month's deals, above the 7% rate in April and the historical average of 29%, according to Moody’s.

The average covenant quality score for bonds rated Caa/Ca recovered to 4.00 from 4.34 in April but remained weaker than the historical average of 3.52, the report said.

Caa bonds accounted for 18% of May's issuance, compared with 39% in April and a historical average of 22%, Moody’s said.

The covenant quality of single B rated bonds weakened to 4.04 from 3.98 in April and the historical average of 3.67.

Single B bonds comprised 47% of May issuance, down from 54% in April.

Essar Steel strongest

The most protective full high-yield packages in May came from iron ore producer Essar Steel Minnesota LLC, with a score of 2.48, followed by Kratos Defense & Security Solutions, Inc. and Sanmina Corp. at 2.77 and 3.21, respectively, Moody’s said.

Essar Steel Minnesota sold $450 million of 11½% senior secured notes due 2020 (Caa1/CCC+/) on May 7 at 97.901 to yield 12%.

San Diego-based tech defense contractor Kratos Defense brought $625 million of 7% senior secured notes due 2019 (B3/B/) on May 9 at 98.966 to yield 7¼%.

San Jose, Calif.-based electronics manufacturer Sanmina priced $375 million of 4 3/8% senior secured notes due 2019 (Ba2/BB/) on May 20 at par.

Scientific Games weakest

Moody’s said Scientific Games International, Inc. brought the weakest full high-yield bond package in May.

The New York City-based gaming company’s $350 million offering of 6 5/8% senior subordinated notes due 2021 (B3/B/) received a covenant quality score of 4.72. Scientific Games priced the notes at 99.321 to yield 6¾% on May 20.

TransDigm, Inc. and Commscope, Inc. also brought deals that received weak covenant ratings from Moody’s.

TransDigm’s $2.35 billion two-part offering of senior notes (Caa1/CCC+/) on May 20 received a 4.64 covenant quality score. The Cleveland-based aircraft component manufacturer sold $1.15 billion of 6% notes due 2022 at par and $1.2 billion of 6½% notes due 2024 at par.

Commscope’s $1.3 billion two-tranche deal (B2/B+/) priced on May 15 also received a 4.64 covenant quality score from Moody’s. The Hickory, N.C.-based communications infrastructure services provider sold $650 million of 5% notes due 2021 at par and $650 million of 5½% notes due 2024 at par.

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