Moody’s Says Junk-Bond Protections Drop; U.S. Credit Swaps Rise

Financial requirements for speculative-grade bond issuers in North America weakened in February, according to Moody’s Investors Service. A measure of U.S. corporate credit risk increased.

High-yield, high-risk covenant quality deteriorated to 4.36 last month from 3.84 in January, reversing three months of gains, according to a Moody’s report dated yesterday. A higher score denotes weaker covenant quality on a scale from 1 to 5.

Covenants worsened as “issuance volume in February, as in January and December, was roughly half the level that accompanied worsening covenant quality last autumn,” analysts led by Alexander Dill wrote in the report. Speculative-grade bond sales in the U.S. fell to $16.3 billion in February, a six-month low, according to data compiled by Bloomberg.

“February’s score was the lowest since we began tracking North American high-yield bond covenant quality in January 2011,” Evan Friedman, senior covenant officer, wrote in the release that accompanied the report.

High-yield bonds are rated below Baa3 by Moody’s and less than BBB- at Standard & Poor’s.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, rose for the second day, widening 1.1 basis points to 65.1 basis points as of 4:21 p.m. in New York, according to prices compiled by Bloomberg. The measure was poised to close at the highest level in more than a week.

United Rentals

The swaps gauge typically rises as investor confidence deteriorates and falls as it improves. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

United Rentals Inc., the junk-rated equipment rental company, plans to borrow $1.375 billion in a two-part bond offering. The company, based in Stamford, Connecticut, intends to issue $850 million of notes due 2024 and $525 million of additional 6.125 percent securities due 2023, according to regulatory filings. Proceeds will help fund the $780 million acquisition of National Pump Co.

The extra yield investors demand to own investment-grade corporate debt in the U.S. instead of government debentures widened 1.1 basis points to 100.5, Bloomberg data show. The average spread for junk bonds increased 5.1 basis points to 400.1, the data show. A basis point is 0.01 percentage point.

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