Feb 12 (IFR) - Covenant quality on North American high-yield
bonds declined to its lowest-ever level in January, mostly due
to a spike in issuance of high-yield-lite bonds, Moody's
Investors Service said on Tuesday.
High-yield-lite bonds provide investors with fewer
protections than full covenant bonds on payment terms and
The Moody's Covenant Quality Index declined to 3.89 in
January from 3.79 in December. The index measures covenant
protection on a scale of 1 to 5 with 5 being the weakest.
Moody's has tracked the CQI since January 2011.
"Weakening covenant scores show that investors are taking on
more covenant risk despite less yield, as average spread to
benchmarks tightened in the 2nd half of 2012, fueled by strong
investor demand and record volume of HY issuances," Moody's
analysts said in a report.
The deterioration in covenant quality started last July and
has continued every month since then for different reasons, the
In September, for example, 34.6% of bonds issued with Single
B ratings had the weakest covenant score, compared with a
historical average of 21.1%.
In October, there was a spate of payment-in-kind (PIK)
issuance. PIK deals give the issuer the option of repaying the
debt in kind -- i.e., by issuing more bonds instead of paying
Since then, more companies have issued high-yield-lite
bonds, including Netflix, jet maker Lear, packaging company
Crown Americas, food packager Sealed Air and chemicals company
In January, homebuilders D.R. Horton Inc. priced two
such deals and Lennar Corp issued one. Homebuilders are
typically big issuers of high-yield-lite bonds.
January's reading was also hurt by an increase in issuance
of bonds rated at Ba, which accounted for 58% of high-yield
supply in the month, well above the historical average of 27%,
Bonds with that rating generally have more relaxed covenant
packages as investors are willing to tolerate less protection in
return for less-risky debt than found lower down the credit
There was also an increase in the number of bonds rated
Single B that had weaker-than-average covenant quality.