Moody's: Growth in high-yield lite issuance to continue in 2016

HY-lite bonds issuance will continue to rise through 2016, says Moody's Investors Service in a report published today. In the first half of 2016, 37% of all speculative grade issuance was high-yield lite, versus 28% in 2015. 

Moody's report, entitled "Speculative-grade Bond Covenants - Europe: Growth in High-yield Lite Issuance To Continue Through 2016" is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. The rating agency's report is an update to the markets and does not constitute a rating action. 

Moody's defines high-yield lite (HY-lite) as a speculative-grade bond with a covenant package which lacks a restricted payments covenant and/or a debt incurrence covenant, and includes euro medium term note (EMTN) trades. 

"We expect that high-yield lite issuance will remain dominated by Ba-rated issuers refinancing existing debt through 2016. Average covenant quality protections for full package high-yield bonds will likely remain weak through the second half of this year," says Lisa Gundy, VP-Senior Covenant Officer at Moody's. 

The majority of HY-lite will be Ba-rated in 2016. In the first half of 2016, 94% of all HY-lite issuance was Ba-rated versus 90% in 2015. Ba-rated issuers will probably remain responsible for a large share of market activity for the rest of 2016, and most HY-lite issuance. Market access and the low yield environment remains more volatile for lower-rated issuers, which also reduces their ability to negotiate weaker covenants. 

As M&A activity remains muted, issuance will remain dominated by issuers refinancing existing debt through 2016. Of the full package high-yield bonds issued in the first half, 58% of issuers used the proceeds primarily to refinance existing debt compared with 74% in 2015. 

However, unlike previous years, the covenant protections are tighter for refinancing transactions than for non-refinancing transactions.