In a bid to help investors assess the protections that U.S. and Canadian leveraged loan covenants provide to them, Moody’s Investors Service has launched a new scoring system for these provisions.
The rating agency’s scores are presented on a five-point scale, ranging from the most protective loan covenant packages (LCQ1) to the weakest covenants (LCQ5). The scoring criteria is based on common structures seen in credit agreements since 2008, as well as its Moody’s experience evaluating leveraged loan covenants.
“Investors will be able to use the scores to rank covenant quality among different loans and to compare it across sectors, rating levels, private equity sponsors and domiciles, among many other comparisons,” said Jessica Reiss, vice president, senior covenant officer, at Moody’s.
Moody’s calculates the new scores from the scores that it assigns to individual bond covenants and provisions in seven key risk areas within the loan covenant package. “The component scores, which will also be published, will give investors additional insight into which parts of the package have stronger or weaker protections,” it notes.
“The scoring criteria will apply through market cycles and will be a benchmark for covenant trends because they won’t be adjusted in the future to accommodate weakening or strengthening loan covenant structures,” Reiss said. “The scores are objective measures based on the covenant package on the loan closing date.”
Moody’s notes that the introduction of loan covenant scores follows the launch of a covenant quality scoring system for high-yield bonds in 2012, which uses the same scale.
“We use the same analytical approach in both the loan scores and the bond scores, but apply them differently to reflect the risks and structures unique to each asset class,” said Evan Friedman, vice president, senior covenant officer, at Moody’s.