The strength of speculative-grade bond covenants, which are written into the terms of debt agreements as a means to protect investors, fell to a two-year low in November, according to Moody's Investors Service.

The average covenant score, in which 1 is the strongest and 5 the weakest, was 4.15 last month, the lowest since the rating company began tracking the data in January 2011. Thirty percent of the bonds issued in November were so-called covenant lite, lacking such features as restricted payments and incurrence stipulations, compared with a 17.2 percent historical average, analysts led by Alexander Dill wrote in a report dated yesterday.

“November issuance was the weakest since the start of our covenant scoring,” the analysts wrote. “Abnormally light issuance is often dominated by more creditworthy issuers with weak covenants.”

The weakest sector was chemicals, according to the report, with bonds from a unit of Huntsman Corp., the third-biggest producer of titanium dioxide, and Parma, Ohio-based GrafTech International Ltd. scoring the lowest possible grade.

November was the second consecutive month that Caa rated bonds had weaker average scores than B rated bonds, the analysts wrote. Lower-rated bonds normally have stronger covenant packages since investors expect weaker credits to offer more protection, Moody's said.

Instant Insights /

High-Yield Covenant Quality Falls to Two-Year Low

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