Junk-Bond Protections Hit Lowest Quality on Record, Moody’s Says

Investor protections in new U.S. junk bonds fell to the weakest level in at least four years as risky borrowers are able to dictate terms to yield-starved investors, according to Moody’s Investors Service.

The rating company’s gauge of the strength of investor safeguards registered its worst reading in February for newly issued speculative-grade bonds in data going back to January 2011, analysts Alexander Dill and Evan Friedman wrote in a report today. Moody’s covenant-quality gauge, in which 5 indicates the weakest protections and 1 the strongest, measured 4.51 for bonds issued in February, up from 4.41 in January and surpassing the previous record of 4.43 in September 2014. Covenants are protections written into bond documents that can restrict an issuer’s ability to borrow more.