Covenant Arbitrage Exploited in High-Yield Bonds: Credit Markets

The hundreds of pages of tedious documents that govern every corporate bond sold are suddenly a hot commodity as traders look for an edge with the biggest bull market ever in junk debt slowing.

Chesapeake Energy Corp.’s $1.3 billion of 6.775 percent notes climbed to a record 104.5 cents on the dollar in a wager that the natural gas producer has run out of time to repurchase the debt at par, or 100 cents, as allowed by the debt’s covenants. Plano, Texas-based J.C. Penney Co.’s 7.125 percent notes due 2023 have risen 9 percent this month, even as the rest of its debt plummets, in a bet the retailer will be forced to repay the issue early because of a covenant breach.