High-yield bond covenant quality improves for third month, Moody's says

By Cristal Cody

Tupelo, Miss., Feb. 12 - The overall covenant quality of North American high-yield bonds improved for the third consecutive month in January on light issuance, Moody's Investors Service said in a report on Wednesday.

"A material improvement in February amid stronger issuance would cement the positive trend," according to the report, "Bond Covenant Quality Improves for Third Month in a Row in January."

The average covenant quality score was 3.84 for the first month of the year, compared with 4.00 in December and 4.18 in November, according to Moody's, which measures covenant quality on a five-point scale with 1.0 for the strongest investor protections and 5.0 for the weakest.

"The average monthly CQ score has been improving since hitting a record low of 4.26 in October," Alexander Dill, head of Moody's covenant research, said in a release. "But issuance in both December and January was roughly half the level that accompanied the worsening trend seen last fall, limiting the conclusions we can draw from the data."

Stronger covenants for bonds rated Caa at issuance and the small percentage of high-yield light bonds, or those missing a restricted payments or debt incurrence covenant, were the key drivers of January's gain, Dill said.

"The average CQ score for Caa rated bonds took a quantum leap to 3.63 last month from 4.39 in December, and Caa bonds accounted for 38% of issuance in January, well above the historical average of 22%," he said.

B rated bonds, "the sweet spot in the high-yield market," improved to a covenant quality score of 3.77 from 4.01 in December. B rated bonds comprised 43% of January high-yield issuance, compared with the historical average of 50%, according to the report.

A lower share of Ba rated bonds - which accounted for 19% of January's deals, compared with the historical average of 28% - also helped support the covenant improvement in January, Moody's said. The covenant quality of Ba rated bonds weakened to 4.43 from 3.69 in December.

Seven Generations scores best

The most protective full high-yield package in January came from Seven Generations Energy Ltd., followed by bonds from Radio One, Inc. and Northern Blizzard Resources Inc., Moody's said.

Moody's gave Seven Generations' 8¼% senior notes due 2020 (Caa1/CCC/) a covenant quality score of 2.75. The Calgary, Alta.-based energy company sold $300 million of the notes at 107 to yield 6.652% on Jan. 31.

Radio One's 9¼% senior subordinated notes due 2020 (Caa2/CCC/), priced in a $335 million deal on Jan. 29 at par, were given a 2.88 covenant quality score. Radio One is a Silver Spring, Md.-based radio broadcaster.

Northern Blizzard Resources' 7¼% senior notes due 2022 received a 2.99 score. The Calgary, Alta.-based oil and gas development and production company sold $425 million of the notes on Jan. 24 at par.

JLL/Delta scores worst

The weakest full high-yield covenant bond package in January came from JLL/Delta Dutch Newco BV, according to the report.

The financing arm of New York-based private equity firm JLL Partners and Netherlands-based vitamin maker Royal DSM NV sold $450 million of 7½% senior notes due 2022 (Caa2/CCC+/) on Jan. 23. Moody's gave the issue a covenant quality score of 4.55.

Bonds from Ply Gem Industries, Inc. and NRG Energy, Inc. also received weak covenant quality scores, Moody's said.

Ply Gem Industries' 6½% senior notes due 2022 (Caa1/CCC+/), priced in a $500 million offering at par on Jan. 16, were given a 4.31 covenant quality score. The company is a Cary, N.C.-based manufacturer of exterior building products.

NRG Energy's 6¼% senior notes due 2022 (B1/BB-/) received a covenant quality score of 4.16. The Princeton, N.J.-based energy company priced $1.1 billion of the notes (B1) at par on Jan. 10.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.