x
Breaking News
0

High-Yield Bond Quality At All-Time Low

By ValueWalk (Rupert Hargreaves)BondsJul 13, 2017 11:53AM ET
www.investing.com/analysis/high-yield-bond-quality-at-all-time-low-200200991
High-Yield Bond Quality At All-Time Low
By ValueWalk (Rupert Hargreaves)   |  Jul 13, 2017 11:53AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Covenant Quality is terrible but is it a long-term trend or skewed because of one month's data?

It’s never been better to be a high-yield issuer or high-yield investor. According to Moody’s, the US high-yield default rate fell to a two-year low in the first quarter amid commodity-price stability and lack of debt-payment pressures after a long period of bond refinancing and maturity extensions.

Additionally, Moody’s Liquidity Stress Index slumped to its lowest level since November 2014 last month on the back of improving corporate earnings and accommodative credit markets. These favorable conditions should have sparked a rush to issue high-yield debt, but so far high-yield issuance has disappointed. Issuance to June 8 was $131 billion, the second-lowest volume since 2010 with two-thirds of the volume earmarked for refinancing according to Bloomberg.

However, in Europe the situation is a little different. Companies sold €1.5 billion of notes with the ratings of at least seven levels below investment grade last week, the busiest week since April 2014. In what could be interpreted as a marker of a lack of fiscal discipline, more European companies are taking on debts to pay dividends. According to Bloomberg, always have issued €3.5 billion of bonds this year to pay shareholders, compared with €450 million in the same period last year.

Still, it seems that investors are so desperate for yield that they are willing to pay up, even for the riskiest types of debt and according to Moody’s, investors are not asking for anything in return.

Covenant Quality Worst Ever

In a new report from the credit rating agency, June corporate bonds provided the worst protection of any single month on record for investors. According to Moody’s Covenant Quality Index, US and Canadian bonds issued during the month of June had a quality rating of 4.48, weakening from 4.26 in May and only four basis points of the record worst 4.52 set in August 2015. The CQI now sits 109 basis points weaker than its record-best of 3.39 in April 2011 and 45 basis points weaker than its historical average of 4.03. Moody’s notes that the low June CQI score was a result of the “highest concentration of high-yield-lite bonds we have ever seen and a high volume of private-equity sponsored bonds featuring weakest-level protection.” The report continues, “HY-lite bonds represented a record 60% of June’s single-month issuance and a record 47% of bonds included in the June CQI.”

Moody’s Covenant (Corporate Bond) Quality Index
Moody’s Covenant (Corporate Bond) Quality Index

One explanation for this could be the higher than the average number of Ba-rated bonds issued last month, as the Moody’s report explains:

Concentration of Ba-rated bonds continues to increase. Nearly 47% of bonds in the June CQI carry a Ba rating, outpacing the historical average of 33%. This percentage has increased for six consecutive months, starting in December when it stood at 27%. Ba-rated bonds feature the least protective covenants so an increase in their issuance generally correlates to a weakening in the CQI. This month, as the Ba concentration increased, CQ scores for the Ba-rated bonds weakened to 4.84 from 4.62 in May, intensifying the impact on the CQI. The historical average CQ score for Ba-rated bonds is 4.45.

High-Yield Bond Quality At All-Time Low
 

Related Articles

High-Yield Bond Quality At All-Time Low

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

 
Are you sure you want to delete this chart?
 
Write your thoughts here
 
Replace the attached chart with a new chart ?
Post
Post also to:
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
 
Replace the attached chart with a new chart ?
Post 1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email