Halister News

--DEREK WALLBANK

(Bloomberg) -- Increasing concentration of Ba-rated bonds drives North American Covenant Quality Index to “weakest level” designation, Moody’s says in a report late Tuesday.

• CQI worsened to 4.27 (weakest) in May from 4.19 in April; a higher score represents lower covenant quality on Moody’s scale from 1 to 5.
• Percentage of Ba-rated bonds in CQI has risen for 5 straight months; Moody’s says bonds of this rating have the least protective covenants
  • NOTE: Ba1, Ba2, Ba3 represent the first, second and third steps below investment grade, respectively
  • Caa/Ca-rated bonds represented a lower proportion of the basket for the 4th straight month
• Greater percentage of HY- lite bonds, which lack fundamental protections against leveraging, also worsened protection quality
  • These bonds came from chemicals; construction and homebuilding; healthcare; leisure; lodging & entertainment; manufacturing; oil & gas and services sectors
  • Caa/Ca and single B-rated bonds continue to offer near-equivalent covenant protection, Moody’s says
• Private equity bonds resume strengthening quality after streak of weak levels
• Abundance of retailers rated B3 negative and below that allow unrestricted subsidiary asset transfers threatens loan and bond recoveries

To contact the reporter on this story: Molly Smith in New York at msmith604@bloomberg.net To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net Rick Green, Dan Wilchins