Moody’s: High-yield bond covenant quality declines marginally in July

By Cristal Cody

Tupelo, Miss., Aug. 13 – North American high-yield bond covenant quality declined marginally in July for the second month in a row, Moody’s Investors Service said in a report released on Wednesday.

The average covenant quality score dipped to 4.14 in July from 4.10 in June, according to the report “Bond Covenant Quality Dips Slightly in July for Second Consecutive Month.”

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

“July’s dip was largely attributable to a decline in the covenant quality of Ba-rated bonds,” Moody’s senior covenant officer Evan M. Friedman said in the report. “And that offset an improvement in the quality of bonds rated single B, Caa and Ca at issuance.”

Bonds rated Ba at issuance had an average covenant quality score of 4.58 in July, a significant drop from June’s 4.26 and weaker than the historical average of 4.31.

Ba-rated bonds made up 33% of July’s total issuance, compared to 28% in June, the report said.

The average covenant quality score of single B bonds improved to 3.92 from 3.96 the prior month and accounted for 48% of July’s issuance.

The covenant quality of bonds rated Caa or Ca at issuance improved in July to 3.91 from 4.35 in June but remains weaker than the historical average of 3.53, Moody’s said.

Bonds rated Caa or Ca accounted for 18% of July’s issuance versus 14% in June, according to the report.

Moody’s said the most protective full high-yield packages in July came from Rex Energy Corp., which received a 2.80 covenant quality score, followed by bonds from Light Tower Rentals, given a 2.83 score, and Citgo Petroleum Corp., which scored 2.84.

The month’s weakest bond covenants offering came from Summit Midstream Holdings, which received a covenant quality score of 4.63, Moody’s said.

Other issuers that priced bonds with weak covenant packages over the month included MHGE Parent, given a 4.62 score, and Mallinckrodt International Finance, which received a 4.60 covenant quality score, Moody’s said.

“The spread to benchmark for new bond issuance narrowed meaningfully again in July, while covenant quality remains near a record low,” Friedman said. “The amount of spread continues to reflect a disconnect between risk premiums and investor protections.”

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