Covenant quality hits new low in November: Moody's

Tue Dec 11, 2012 4:37pm EST

Dec 11 (IFR) - Covenant quality hit a new low in November, according to Moody's Investors Service, which began tracking covenant scores in January 2011. This extends the deterioration that the rating agency has seen since July.

Thirty percent of November bonds had high-yield-lite covenant packages, which compares with 17.2% historically. The average covenant quality score in November was 4.15 on Moody's five-point scale (with a score of 1 being the strongest and 5 the weakest).

Moody's found that the weakest sector was chemicals, with bonds from Huntsman International, GrafTech International and Celanese US Holdings scoring among the weakest for covenant quality.

Moody's also found that November was the second consecutive month that Caa-rated bonds had weaker average covenant quality scores than B-rated bonds. Normally, lower rated bonds have stronger covenant packages than higher rated bonds as investors demand more protection for the added risk.

Nine bonds that priced in November had high-yield lite packages, compared with seven in October. Eight of the nine bonds in November were rated in the B category. The only Triple C rated bond was Legacy Reserves' US$300m 8% senior notes due 2020.

Between January 2011 and November 2012, only 6.9% of bonds rated Caa scored in the weakest category of protection, on average. This figure was 31% in October, however, and 7.7% in September.

Four companies in November used repeat cov-lite structures, including Clear Channel, El Paso Pipeline Partners, Royal Caribbean Cruises and SprintNextel. Huntsman International and Sealed Air converted to covenant-lite packages for the first time, Moody's said, while Graftech and Land O'Lakes were first time issuers that successfully priced deals with covenant lite packages.

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