Moody's: February's North American high-yield bonds offer weakest protections on record

North American high-yield bond covenant quality declined to a new record low in February, Moody's Investors Service says in a new report. The average covenant quality score for the month weakened to 4.51, worse than the 4.41 score for January and overtaking the previous record low of 4.43, set in September 2014.

Moody's measures bond covenant quality on a five-point scale, with 1.0 denoting the strongest investor protections and 5.0, the weakest.

"North American high-yield bonds issued last month had the weakest average covenant quality since we began scoring bond covenant quality in 2011," says Vice President -- Senior Covenant Officer, Evan Friedman. "Additionally, the percentage of high-yield lite bonds spiked last month, to 46% of total high-yield issuance."

High-yield lite bonds accounted for 27% of January's issuance and the historical average is 22%. High-yield lite bonds lack either a debt incurrence covenant or a restricted payments covenant, or both, and automatically receive the weakest possible covenant quality score of 5.0.

February marked a return to a normal level of issuance after two light months, with a total of 26 high-yield bond offerings, Friedman says in "Bond Covenant Quality Remains Near Record-Low For Sixth Consecutive Period." Just three of these came from oil and gas companies, whose bonds tend to offer stronger than average investor protections. As in January, the relative absence of bonds from the oil and gas sector due to the drop in oil prices helps explain the weak monthly score.

Moody's Covenant Quality Index, which uses a three-month rolling average, also remains near its record low of 4.42, set in November last year, Friedman says. The index weakened to 4.33 in February from 4.32 in January.

"February was the sixth consecutive month in which the Covenant Quality Index was weaker than 4.20, with the covenant quality of full-package bonds included in the index deteriorating to 3.97 from 3.93 in January, driven by a decline in cash leakage and risky investment protections, both of which fell to record lows last month."

Among February's bond issues, the most protective full high-yield package came from Cogent Communications Group, Inc., whose bond scored 2.79, denoting moderate investor protections. Bonds from CrownRock, L.P. and iHeart Communications, Inc. came next, with scores of 3.31 and 3.46, respectively. The least protective full high-yield packages came from American Airlines Group Inc., whose bond scored 4.93, followed by a bond from Oshkosh Corporation, at 4.53 and two series of notes issued by Dollar Tree, Inc., each at 4.53.

Moody's research subscribers can access this report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1003706.