VANCOUVER (miningweekly.com) – High-yield bonds issued in the metals and mining sector provide weak covenant protection, Moody's Investors Service said in a new report, issued Friday.
The average covenant quality (CQ) score under the credit rating agency's scoring criteria for the 56 North American metals and mining companies with high-yield bonds still outstanding as of March 31, drawn from Moody’s high-yield covenant database since 2011, is 3.9.
Covenant quality is based on a scale of one to five, with a higher score indicating weaker covenant protection.
Moody's high-yield covenant database contains covenant data for more than 3 000 bonds issued globally since January 2010.
The report finds the average CQ score is 3.55, with the risk category, leverage, having the worst score among all risk classifications, at 4, followed by risky investments at 3.81, excluding high yield lite bonds.
"The 16 high-yield lite bonds in our sample were issued by five issuers, three of which are fallen angels. However, only two of five are currently Ba-rated, the most likely to receive high-yield lite terms,” Moody's analyst Danny Gao stated in a release sent to Creamer Media’s Mining Weekly Online.
Moody's says the prevalence of HY-lite packages among steel companies is indicative of their stature in the industry, as well as a long history of issuing bonds and the ability to generate strong earnings growth when business conditions are more favourable, the rating agency stated.
Cov-lite (or covenant light) is financial jargon for loan agreements that do not contain the usual protective covenants for the benefit of the lending party.
However, after excluding the HY-lite bonds, the steel subsector provides the weakest covenant protection among all full-package bonds. The subsector saw an average CQ score of 4.02, with cash leakage (4.21,) risky investments (4.24), and leveraging (4.30) all receiving scores in the weakest range of the scoring criteria.
"One feature increasingly prevalent in full-package bonds is an issuer's ability to make any restricted payment, as long as a pro forma leverage ratio is satisfied," adds Gao. "If the ratio test is met, the restricted payments covenant is effectively removed."
Bonds issued by coal issuers, many of which have recently emerged from bankruptcy, have an average CQ score of 3.19, the best among all subsectors, thanks to three bonds issued in the first quarter of 2017 by Peabody Energy (B1 stable) and Foresight Energy (B3 stable), all of which provide above-market covenant protection.