U.S. Junk-Bond Covenant Quality Rises to 2013 High, Moody’s Says

The strength of U.S. speculative-grade bond covenants written into the terms of debt agreements to protect investors rose in June to a six-month high, according to Moody’s Investors Service.

The average covenant score, in which 1 is the strongest and 5 the weakest, fell to 3.72 in June from 3.99 percent the previous month, Moody’s analysts led by Alexander Dill wrote in a report dated yesterday. That’s the strongest since 3.63 in December.

Bonds with ratings in the top junk tier of Ba, which typically have weaker covenant packages, accounted for 21 percent of high-yield bonds issued in June, below a historical average of 27 percent, the analysts said.

“With issuance down sharply in June and many companies postponing deals, those that went to market may have had to offer somewhat better covenant terms to a suddenly more discriminating market,” they wrote.

Bonds from Rite Aid Corp., the third largest U.S. drug-store chain, offered the strongest protections last month, while the debentures of aircraft parts manufacturer TransDigm Group Inc. had the weakest.

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