Lots of people think the economy is still weak, but it’s been over a year since we started hearing that investors were willing to accept weaker covenants in exchange for better returns. From The Wall Street Journal, here’s a piece on how the covenants of bond issues have weakened as potential buyers have gotten less picky.
Corporate bonds are bought by investors who want the steady (interest) income paid as their semi-annual coupons.
But, a bond is a bundled good: the returns it kicks off, and the covenants that protect the buyer.
Bonds are issued in big bunches, and the covenants are the rules governing the whole bunch that is issued together.
So, if you want a higher return from the seller, they’ll gladly give it to you if you’ll accept weaker covenants.
When Tenet Healthcare Corp. sold $600 million in junk bonds in August, investors had fewer protections than they had in previous Tenet bonds. The bond deal from the Dallas hospital operator and health-care company lacked an asset-sale covenant, which would have forced the company to use proceeds from the sale of a material asset to buy another asset, make capital expenditures or repay bond investors.
Those covenants also prevent companies from using cash from asset sales to pay salaries. …
… Bonds issued by Chesapeake Energy Corp., an Oklahoma City company that is the second-largest U.S. natural-gas producer, illustrate how new bonds are being sold. In an August sale, Chesapeake sold $2 billion worth of junk bonds maturing in eight and 10 years. Chesapeake is using the bond sales to pay down existing debt and for general corporate use, the company said in an August news release.
According to Covenant Review, neither bond offers a "change-of-control" covenant. When that protection is included and a company is sold, bondholders can sell back their bonds at 101% of par value. …