Junk-Bond Covenants Deteriorate With Record Sales, Moody’s Says

A measure of the strength of investor protections in speculative-grade U.S. bond offerings deteriorated in the 12 months ended September, according to Moody’s Investors Service.

Moody’s covenant-quality index, in which 5 indicates the weakest protections and 1 the strongest, rose to 3.64 from 3.41 in the year ended August, analysts Alexander Dill and Kyle Goodwin wrote in a report today. The measure for deals in September alone climbed to 4.05, the highest monthly reading in data going back to January 2011.

Corporate issuers sold a record $56 billion of dollar-denominated junk bonds in September, a 33 percent increase from a year earlier as speculation mounted that the Federal Reserve would soon start reducing $85 billion of monthly asset purchases that have bolstered debt markets and drove borrowing costs to the lowest ever, according to data compiled by Bloomberg.

“Investors’ continuing appetite for higher yields amid still-low rates on U.S. Treasury bonds has driven speculative-grade corporate bond issuance higher and covenant protections lower,” Goodwin said in a statement.

Covenants in speculative-grade debt offerings deteriorated in 21 out of 27 non-financial corporate sectors and subsectors over the 12-month period, according to the report.

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