Covenant quality improves marginally in November, Moody’s report says

By Cristal Cody

Tupelo, Miss., Dec. 8 – The covenant quality of North American high-yield bonds improved marginally in November, though the month overall was weaker, according to a Moody’s Investors Service report on Tuesday.

Moody’s said its covenant quality index improved modestly to 4.20 in November from 4.21 in October.

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

“The weakest-level covenant quality indicates that despite marginal improvements, investors continue to trade away covenant protection in search of higher yield,” Evan Friedman, Moody’s senior covenant officer, said in a release.

The index is 83 basis points weaker than its record best of 3.37 in April 2011, Moody’s said.

High-yield bonds priced in November had an average covenant quality score of 4.32, weaker than the average covenant quality score of 4.19 for bonds brought in October, according to the report, “North American Covenant Quality Index: Covenant Quality Sees Marginal Improvement in November.”

“We attribute the weakening to a higher-than-normal volume of Ba-rated issuers coming to market, with typically weak attendant covenants,” the report said.

Ba-rated bonds accounted for 54% of the month’s issuance volume, higher than both 40% in October and the historical average of 32%, Moody’s said. The average covenant quality score for November’s Ba-rated bonds was 4.50, stronger than the October average of 4.81 and nearing the 4.40 historical average.

Strongest, weakest

The most protective full high-yield packages in November came from American Energy – Permian Basin, LLC and M/I Homes, Inc., Moody’s said.

American Energy – Permian Basin’s $530 million offering of 13% five-year senior secured first-lien notes (B2/B) received a 2.8 covenant quality score.

M/I Homes’ $300 million sale of 6¾% senior notes due 2021 (B1/B+) received a 3.45 score.

The weakest full high-yield packages in November were from NCL Corp. followed by American Builders & Contractors Supply Co., Inc. and Sally Holdings LLC.

NCL’s $600 million issue of 4 5/8% senior notes due 2020 (B2/BB-) received a covenant quality score of 5.00, the weakest.

American Builders’ deal received a 4.6 score. The company sold $350 million of 5¾% senior notes (B3/BB-) due 2023.

Moody’s gave Sally Holdings’ $750 million offering of 5 5/8% senior notes due 2025 (Ba2/BB+) a 4.59 covenant quality score.

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