Nov 9 (IFR) - Covenant quality for high-yield bonds
deteriorated in October, as especially lower-rated credits came
to market with more aggressive structures, Moody's Investors
Service said on Friday.
Of the Caa-rated bonds covered by the rating agency, 31% are
in its weakest covenant quality category, compared with a
historical average of just 3.5% and a September reading of 7.7%.
"October's distinguishing feature is the poor covenant
protection in the lowest-rated credits," said Alexander Dill,
Moody's vice president and head of covenant research.
"For Caa-rated bonds, the historical relationship between
ratings and covenant quality broke down in October after holding
The deterioration was mostly due to significant lien and
structural subordination risk, said Dill. It cited as example
Tenet Healthcare Corp's 6.75% senior notes due 2020, one
of few Caa-rated bonds with a high-yield-lite pacakge to emerge
Lower-rated bonds usually have stronger covenants than
higher-rated bonds, because investors demand more protection for
the increased risk.
Private equity-sponsored and secured bonds also saw covenant
quality deteriorate in October, said Moody's.
And PIK, or payment-in-kind, issuance increased with five
bonds from TransUnion Holding Company, Petco Holdings Inc,
Jo-Ann Stores Holdings Inc, Jaguar Holding Company and BWAY
Parent Company Inc coming with weak PIK structures.
NBTY Inc also issued a PIK bond through Alphabet Holding
Company Inc, said the agency.
PIK structures accounted for 10.4% of October's overall
issuance. Companies issue PIK notes at the holding-company
level, usually to pay dividends to a private-equity sponsor.
Bonds rated B1 through B3 showed improvement in October,
however. Just 16.7% of bonds in that category had the weakest
covenant quality, down from 28.6% in September.
And one bond in that category achieved a strong score -- oil
services company Offshore Group Investment Ltd, which issued
7.5% senior unsecured first lien notes due 2019 that were rated