Private-Equity-Owned Issuers Lead Bond-Covenant Weakening

Private-equity-owned companies are increasingly giving weaker covenant protections to bondholders than other corporate borrowers in the high-yield debt market, according to Moody’s Investors Service.

Manufacturing had the sharpest decline in covenant quality, driven by notes Gates Global LLC issued to help finance its buyout by Blackstone Group LP, according to a report from Moody’s yesterday. Health care was next, with Carlyle Group LP-owned Ortho-Clinical Diagnostics Inc.’s bond offering driving the decline in the year ended June 30.

“While lower-rated bonds typically have more protective covenants, the opposite is true here, indicating investors are willing to purchase high credit risk debt lacking protective covenants,” Moody’s analysts wrote in the report.

Gates sold $1.04 billion of 6 percent unsecured notes rated Caa2, or eight levels below investment grade, in June to help finance its acquisition. Ortho-Clinical issued $1.3 billion of 6.625 percent unsecured notes with a Caa1 rating in May for its buyout by Carlyle.

High-yield, or junk, debt is rated below Baa3 by Moody’s and BBB- by Standard & Poor’s.

Ortho-Clinical’s 6.625 percent notes have fallen to 94.25 cents on the dollar to yield 7.62 percent from 99.5 cents at the end of June, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Gates’s 6 percent notes traded at 96.5 cents today to yield 6.57 percent, down from 100.25 cents on June 30, Trace data show.