Moody's: High-yield bond covenant quality rebounds in March from record low in February

By Cristal Cody

Tupelo, Miss., April 9 - The covenant quality of North American high-yield bonds improved in March to 4.13 after a record low of 4.36 in February, Moody's Investors Service said in a report on Wednesday.

February's score was the weakest since Moody's began tracking covenant packages in 2011, according to the report, "Bond Covenant Quality Rebounds From a Record Low Set in February."

Moody's rates the covenant quality of bonds on a five-point scale, with 1.0 for the strongest investor protections and 5.0 for the weakest.

"Although it rebounded, the 4.13 score for March is weak by historical standards, and a single month's improvement augurs no trend," Alexander Dill, Moody's head of covenant research, said in a news release. "However, high-yield bond issuance was relatively robust in March following several weaker months, making the average CQ a stronger indicator of covenant quality."

Beefier covenants for B-rated bonds led to the improvement, which was constrained by a high percentage of high-yield lite bonds during the month, according to the report.

High-yield lite bonds, which receive the weakest possible score from Moody's, made up 33% of issuance in March, above the historical average of 19%.

Covenants for B-rated bonds, which comprised 48% of issuance in March, improved to a score of 3.87 from 4.24 in February, Moody's said.

The average covenant quality score for Caa-rated bonds improved to 3.93 in March from 4.29 in February, according to the report. Caa bonds accounted for 13% of March issuance, slightly higher than 11% in February but below the 22% historical average.

Two of the month's most protective full high-yield covenant packages came from Guitar Center Inc., Moody's said.

Guitar Center sold $615 million of 6½% senior secured notes due 2019 (B3/B-/) at 98.943 to yield 6¾% on March 26. The company also priced $325 million of 9 5/8% senior unsecured notes due 2020 (Caa2/CCC/) at 98.875 to yield 9 7/8% in the offering.

The Westlake Village, Calif.-based musical instrument retailer's secured notes scored 2.36 and the unsecured notes received a 2.46 covenant quality score.

Lafayette, La.-based helicopter services provider PHI, Inc. (B2/BB-/) also was noted with providing strong covenant protections. The company received a 2.51 covenant quality score for the March 6 offering of $500 million of senior notes due 2019, which priced at par to yield 5¼%.

The weakest full high-yield packages in March came from iGATE Corp., Niska Gas Storage Canada ULC and Sungard Availability Services Capital Inc., according to the report.

iGATE's $325 million offering of 4¾% senior notes due 2019 (B1/BB-/), which priced at par on March 19, received a 4.82 covenant quality score. iGATE is an integrated information technology provider with U.S. headquarters in Bridgewater, N.J., and India headquarters in Bengaluru, Karnataka.

Moody's assigned a 4.52 covenant quality score to Niska Gas Storage Canada's $575 million offering of 6½% senior notes due 2019 (B2/B/), which priced at par on March 7. The company is a subsidiary of Houston-based natural gas storage operator Niska Gas Storage Partners LLC.

Sungard Availability Services Capital's $425 million offering of 8¾% senior notes due 2022 (Caa1/B-/), brought at par on March 26, received a 4.5 covenant quality score. The technology operations support provider is based in Wayne, Pa.

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