Moody’s: North American high-yield bond covenant quality declines to record low in February

By Cristal Cody

Tupelo, Miss., March 10 – North American high-yield bond covenant quality declined to a new record low in February following 26 new bond deals, Moody’s Investors Services said in a report on Tuesday.

The average covenant quality score for the month weakened to 4.51, worse than the 4.41 score for January and the previous record low of 4.43 that was set in September, according to the report, “Bond Covenant Quality Remains Near Record-Low For Sixth Consecutive Period.”

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 covenant quality index weakened to 4.33 in February from 4.32 in January.

“North American high-yield bonds issued last month had the weakest average covenant quality since we began scoring bond covenant quality in 2011,” Evan Friedman, Moody’s senior covenant officer, said in a release. “Additionally, the percentage of high-yield ‘lite’ bonds spiked last month, to 46% of total high-yield issuance.”

High-yield lite bonds lack a debt incurrence covenant and/or a restricted payments covenant and automatically receive the weakest covenant quality score of 5.0 by Moody’s.

High-yield lite bonds accounted for 27% of January issuance, higher than the historical average of 22%, the report said.

The most protective high-yield bond package priced in February came from Cogent Communications Holdings, Inc., Moody’s said.

The company’s $250 million sale of 5 3/8% senior secured notes due 2022 (B1/B+/) on Feb. 10 received a 2.79 covenant quality score.

CrownRock, LP and iHeart Communications, Inc. brought the next most protective deals.

The Feb. 3 offering from CrownRock and CrownRock Finance, Inc. of $350 million of 7¾% senior notes due 2023 (Caa1/B) scored 3.31.

iHeart’s Feb. 19 sale of $950 million of 10 5/8% senior secured priority guarantee notes due 2023 (Caa1/CCC+/CCC) received a 3.46 covenant quality score.

The least protective full high-yield package came from American Airlines Group Inc., Moody’s said.

American Airlines’ $500 million offering on Feb. 26 of 4 5/8% senior notes due 2020 (B3/B/) received a 4.93 covenant quality score.

Oshkosh Corp.’s sale of $250 million of 5 3/8% senior notes due 2025 (Ba3/BB+/) on Feb. 17 received the next weakest score of 4.53.

Moody’s ranked Dollar Tree, Inc.’s $3.5 billion two-part offering of senior notes (Ba3/B+/) on Feb. 6 the third least protective deal priced in February with a 4.53 covenant quality score. The company sold $750 million of 5¼% notes due 2020 and $2.5 billion of 5¾% notes due 2023.

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