The Incredible Shrinking Bond Covenant

With fixed-income investors frantic for every basis point of yield, who has time to read the fine print? No one, junk bond issuers and their lawyers increasingly conclude. Paperwork for investment-grade bonds is generally minimal, reflecting the market’s trust in the borrower. But high-yield covenants have typically come with voluminous restrictions meant to ensure issuers keep enough cash on hand to repay, as well as limit their access to other debt.

In today’s seller’s market, borrowers are watering these contracts down with impunity even as interest-rate spreads compress. Moody’s Covenant Quality Index neared a record low in August, the last month in the books. Junk backed by private-equity houses, which traditionally push the borrowing envelope, enjoyed the weakest protections since the credit agency launched the benchmark in 2011. That’s not to mention the raft of “high-yield lite” bonds that dispense with junk protections altogether, passing as investment grade for legal purposes. These accounted for 40 percent of the U.S. high-yield market in August, with beneficiaries ranging from company-of-the-future Tesla to struggling Rust Belt icon U.S. Steel Corp.

Asset managers may literally not have time to unearth the loopholes and fudges that issuers bury within weighty bond prospectuses, says Evan Friedman, Moody’s head of covenant research. “Some of these issues go the same day they are announced,” he says. “A week would be an eternity.”

一名冠军正在为投资者而战，但基于纽约的盟约审查，一群以前的售后律师，帮助买家对他们的旧同事的诀窍明智。“我们的工作曾经是将这些东西置于文件中，”白鞋华街公司Latham＆Watkins的退伍军人，现在负责契约评论的研究。“现在我们提醒买方。”

契约审查警惕的一个重点是所谓的限制性支付条款，该规定应当保证资产和现金流，以确保签发法的法人实体内的债券或贷款。创造性地调整这些条款可以使借款人能够“拉动J.船员”，即契约书籍现在称之为 - 参考私募股权巨头TPG部分拥有的苦恼服装零售商，在转向债权人之前，将有价值的商标和其他资产进行了洗牌债务重新谈判。

Restricted payments covenants are also intended to restrain borrowers’ future leverage, the rule of thumb being that payments cannot exceed 50 percent of consolidated net income. Issuers are proactively bending this stricture too, carving out spurious exceptions for investments that may or may not add to the earnings base, Friedman says. “The environment is as permissive as ever before in allowing for incremental leverage,” he says.

That’s not all. The sell side is also eroding lien agreements that prevent borrowers from subsequently issuing more senior debt, Canale explains. This practice already harmed bondholders in the wave of energy bankruptcies that followed the 2014 crash in oil prices. “When they went back to the documents for some of these issuers, the liens covenant turned out to be worthless,” he says. “So the companies could coerce bondholders to take a haircut if they wanted to get in line in front of the other guys.”

Major bond investors who resist covenant corrosion can win the occasional skirmish, Canale says. A Covenant Review alert in July forced Vivint, a Nasdaq-listed smart home tech provider owned by private equity giant Blackstone Group, to ax provisions that would have allowed the company to be sold without buying back its bonds and paying holders foregone interest income, a protection known as making investors “whole.” But insurance brokerage AssuredPartners managed to market its bond issue days later despite similar objections, Canale admits, and there are no signs of the larger tide turning in investors’ favor. “Every week we see new innovations from the sponsor side,” he says. “Each document is like a tailored suit with its own pockets to manipulate the capital structure.”

从理论上讲，借款人应对债券的债券予以更高的债券来支付较弱的偿还保护。但显然没有人告诉市场。根据美国银行Merrill Lynch数据的说法，穆迪的信用质量措施稳步下滑，而高收益债券在2008年后悬停的黄金汇款悬停在3.5％左右约为3.5％。

投资者do have their reasons to be permissive. Junk default rates have confounded bearish predictions for most of this decade, hewing close to a historically low 2 percent. If 98 percent of bonds pay as promised, there is limited incentive to haggle over contractual minutiae. But issuer sleight of hand and bullying, particularly by the private equity powerhouses, also plays its part, Friedman says. “I can unequivocally say that private equity investors are more aggressive,” he observes. “They use their negotiating leverage, relationships, and awareness to ask for things that other issuers don’t get.”

弗里德曼补充说，净水债券规定的固化可能比疾病更差。“禁止一些较大的宏观经济活动，我们没有预见到2011年到2012年的质量，”他说。“研磨型经济学不会让它回来。”