Moody’s: Covenant quality improves in May on drop in high-yield lite bond volume

By Cristal Cody

Tupelo, Miss., June 9 – Moody’s Investors Service said on Tuesday that its North American covenant quality index strengthened in May to 4.18 from 4.26 in April and 4.36 in March.

Moody’s measures the quality of bond covenants based on a five-point scale, with 1.0 for the strongest investor protection and 5.0 for the weakest.

“May was the first month since August 2014 in which the covenant quality index has come in stronger than 4.20,” Moody’s senior covenant officer Evan Friedman said in an agency news release. “The improved result moves North American high-yield bond covenant quality out of the range that indicates weakest-level investor protections.”

Moody’s said the drop in issuance of high-yield lite bonds fell significantly in May.

“Of the bonds issued in May, only 12% feature lite packages, well below April’s 22%, March’s 25% and the historical average of 22%,” according to the report, “Protection Improves from Weakest Level for First Time Since August.”

High-yield lite bonds lack either a debt incurrence covenant or a restricted payments covenant, or both, and automatically receive Moody’s weakest possible covenant quality score of 5.0.

Tops scores best

The most protective full high-yield packages priced in May came from Tops Holding LLC, whose bonds scored 2.66, Moody’s said. Tops Holding priced $560 million of senior secured notes due 2022 (B3/B) at par to yield 8% on May 29.

The issue from Bellatrix Exploration Ltd. received a strong covenant quality score of 2.85, Moody’s said. Bellatrix priced $250 million of 8½% senior secured notes due 2020 (B3/B-) at 98.03 to yield 9% on May 15.

The deal with the third strongest investor protection that priced in May was from Viking Cruises, Ltd., which received a 2.96 covenant quality score, according to Moody’s. Viking Cruises sold $250 million of senior notes due 2025 (B3/B+) at par to yield 6¼% on May 5.

JBS scores worst

The weakest full high-yield packages in May came from JBS USA, LLC followed by issues from CommScope Technologies LLC and TransDigm Inc., the report said.

JBS USA sold $900 million of senior notes due 2025 (Ba2/BB+) at par to yield 5¾% on May 20. Moody’s assigned a 4.73 covenant quality score to the notes.

CommScope Technologies’ senior notes due 2025 received a 4.69 covenant quality score. CommScope Technologies brought $1.5 billion of senior notes due 2025 (B2/B) at par to yield 6% on May 28.

TransDigm’s offering of $450 million of senior subordinated notes due 2025 (Caa1/CCC+), which priced at par to yield 6½% on May 6, received a 4.63 covenant quality score.

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