Anyone for cov-lite?
In our post-credit crunch era of avowed simplicity and rigorous credit analysis, you’d have thought that bond investors would be demanding tougher terms than ever to finance high yield companies.
Not at all, according to recent research by Moody’s on the growing European high yield bond market, where deal structures are looking rather toppy.
Moody’s highlights recent high yield deals by issuers such as Virgin Media and Wind, noting that the deals’ structures and documentation have in common some featuers seen in top of the market covenant packages from 2006.
For example, recent documentation allows companies in some cases to add back to cashflow items such as expected cost savings from restructurings. That could enable them to take on greater amounts of debt in their leverage tests, Moody’s says. The rating firm also notes that fallen angels who have been junked have continued to issue with investment grade-style debt covenants.
“One might think that, in the aftermath of a severe market disruption, covenant structures would tighten, but this is not the case, either for the bonds of fallen angels or those of long-time high-yield issuers.”
The strength of the European bond market in recent months has been one of the few causes for optimism in the European capital markets. Much of the demand has been driven by a hunt for yield given the poverty of current deposit rates. It looks like investors may be getting sloppy again.