The level of overall covenant protection in junk bonds saw its biggest one-month decline ever in May as the high-yield market underwent a strong rally, Moody's said on Tuesday. The rating agency, which measures covenant quality from a best of 1 to a worst of 5, said the score's monthly average hit 4.56 in May from 3.80 in April. That was the biggest decline seen since Moody's began tracking the number.
Measured on a three-month rolling basis, the score worsened to 4.32 in May from 4.14 in April. The record best three-month level of 3.39 was set in April 2011. Meanwhile junk bonds with investment-grade covenants - known as "high-yield lite" issues - accounted for 42% of May's issuance, well above the 23% historical average.
Not a single high-yield lite issue priced the previous month. While only higher-rated issuers typically get away with weaker covenants, Moody's noted that one-third of May's high-yield-lite bonds were actually in the lower single B range. The largest deals in that category included a US $1.25bn two-part offering for Canadian mining company Teck Resources, a US $1bn bond sale for electricity producer NRG Energy and a US $980m issue for United States Steel.
All received a rock-bottom score of 5 from Moody's. Covenant quality typically decreases when the market is hot, and issuance has been exceptionally heavy in recent weeks. High-yield issuers have been rushing to market to take advantage of lower yields and get ahead of any market upsets caused by the UK's vote on EU memberships. US junk-rated issuers raised US $12bn through new bond sales in the week to June 10, more than in any other week so far this year, according to IFR data.