Moody's: packaging company bonds offer weaker-than-average investor protections

By Cristal Cody

Tupelo, Miss., Dec. 16 - Bonds in the packaging sector offer weaker-than-average investor protections, Moody's Investors Service said in the report "Packaging Bond Covenants Offer Below Average Protection" on Monday.

"The average covenant quality score for the packaging company bonds we reviewed was [3.97], compared with 3.76 for the 980 non-financial corporate bonds in our high-yield covenant database," Edward Schmidt, senior analyst at Moody's, said in a release.

"The covenant quality of packaging companies' bonds was below the North American average even when controlling for rating category."

Moody's measures bond covenant quality on a five-point scale, with 1.0 with the strongest investor protections and 5.0, the weakest.

The packaging sector's weak score reflects the negative impact of seven "high-yield lite" bonds, which were partially offset by strong scores for five bond deals from one company, New Zealand-based Reynolds Group Holdings Ltd., Moody's said in the review of 19 high-yield bonds issued by packaging companies.

"The average CQ score for the packaging sector deteriorates to 4.38 when excluding Reynolds, the largest, most acquisitive and most highly levered issuer in the segment," Schmidt said.

"Most of the deterioration was in the restricted payments and structural subordination scores, offset by a slight improvement in the investments score."

Structural subordination and change-of-control covenants, which Moody's rated scores of 3.58 and 3.35, respectively, were the weakest in the packaging sector relative to North American average scores of 2.77 and 3.06, Moody's said.

The lien subordination and restricted payments covenants were the strongest for the packaging sector with covenant quality scores of 2.97 and 3.33, respectively, versus the North American averages of 3.73 and 3.45, Moody's said.

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