Few bondholders have significant protection from the risk of an event such as a leveraged recapitalizations or a leveraged buyout, according to Fitch Ratings.

The ratings agency noted that bondholders of U.S. investment grade companies are more exposed to risk from leveraged recapitalizations than from leveraged buyouts, and that most investors are exposed to the possibility of these sorts of events.

The Fitch Ratings study published today is based on sample of bonds from 81 issuers included in the Dow Jones North American Investment Grade Index. It found that about 20% of the sample issuers have the incremental capacity to finance an LBO, while essentially all of the sample could finance a significant leveraged recapitalization. Less than 10% of the indentures have change of control protections against an LBO and only two have meaningful financial covenants that would prevent an increase in leverage enough to reduce credit quality, it noted.

The results of the survey are not encouraging for investors in investment grade bonds, the rating agency cautioned. “Size alone offers little or no protection against either type of event risk,” it said.

“Leveraged recapitalizations are likely to be more common and may have a larger aggregate effect on bond prices than the less frequent but more publicized leveraged buyouts,” it said. “Fitch believes that bond investors need to take a broad view of event risk to include leveraged recapitalizations as well as LBOs as the risk of a leveraged recapitalization is more widespread.”

“Few companies are too big to be bought, but many companies are too valuable to be bought with debt,” said Timothy Greening, senior director, Fitch Corporate Finance. “A high stock price that makes an LBO unprofitable and a leveraged recapitalization unnecessary is the best protection for bondholders.”