» A review of 19 packaging deals reveals that they have weaker than average covenant packages compared to North American non-financial corporate issuers. The average Covenant Quality (CQ) score for the packaging company bonds was 3.97 on our five-point scale with 1.0 denoting strong covenant protection and 5.0 denoting the weakest protection. This compares with an average of 3.76 for 980 non-financial corporate bonds in Moody’s High-Yield Covenant Database. Covenant quality is below the North American average even when controlling for rating category. The sector’s weak score reflects the negative impact of seven high-yield lite bonds, partially offset by strong scores for five issues for one issuer, Reynolds Group Holdings.
» Significant impact of one major issuer highlights risks. The average CQ score deteriorates significantly when excluding Reynolds, the largest, most acquisitive and most highly levered issuer in the segment. The overall CQ score weakens to 4.38 with significant deterioration in the restricted payments and structural scores offset by a slight improvement in the investments score. Some of the deterioration can be explained by the higher percentage of secured debt in the sample issued by Reynolds, but both the secured and unsecured component scores for the company are stronger across the board.
» High-yield lite deals concentrated in Ba-rated issuers. Following the trend in North America, the high-yield lite deals were concentrated in the Ba-rated issuers including Ball Corp, Silgan Holdings, Sealed Air Corp, and Crown Holdings.
» Weakest covenants relative to North American averages are structural subordination and change of control. The packaging bonds in the database provide significantly weaker than average protection for structural subordination and change of control with average scores of 3.58 and 3.35 respectively versus North American averages of 2.77 and 3.06. The average scores weaken even further when the Reynolds bonds are excluded.
» Strongest covenants relative to North American averages are lien subordination and restricted payments. The packaging bonds in the database provide stronger than average protection for lien subordination and restricted payments with average scores of 2.97 and 3.33 respectively versus North American database averages of 3.73 and 3.45. However, while the lien subordination score remains above average when excluding Reynolds at 3.41, the restricted payments score deteriorates substantially to below average at 4.28.