Arc of the covenants as investors regain clout over junk bond issuers

Junk bond investors are forcing companies to improve the terms of their debt offerings to bolster protection against moves that threaten creditworthiness. ClubCorp Inc., which has been marketing bonds for almost two weeks, included a provision in its planned $415 million offering to prevent dividend or stock repurchases for two years, according to a person familiar with the offering. Performance Food Group Co. revised its proposed $550 million notes sale to require its units to guarantee the debt once certain real-estate leases expire, another person said. Companies that have been tapping the high-yield, high-risk corporate bond market at the fastest pace on record are having to adjust terms as speculative-grade debt heads for its first monthly loss since May. Changes to creditor protections show that investors are reclaiming the balance of power from issuers, said Alex Dill, senior covenant officer at New York-based Moody's Investors Service. “There were a lot of issues that came to market, and oversupply let investors be more discriminating,” Dill said. “They're shifting the level of protection back toward bondholders.” ClubCorp, based in Dallas and owned by KSL Capital Partners LLC, sold its 10 percent notes due in December 2018 yesterday at a yield of 11 percent after saying it would change the covenants, according to data compiled by Bloomberg. The company added a provision of the bond sale to prevent dividends or stock repurchases for two years, unless ClubCorp completes a $125 million underwritten public equity offering said the person, who declined to be identified as the marketing was private. Patty Jerde, a ClubCorp spokeswoman, didn't return a call seeking comment. ‘Take Anything' Performance Food Group of Richmond, Virginia, may issue its debt at a yield of 10.5 percent as soon as today, said the person, who also declined to be identified because terms aren't set. Nortek Inc. sold $250 million of debt on Nov. 18 after eliminating a provision that allowed it to call up to 10 percent of the notes at 103 cents on the dollar for three years, according to another person. The company earlier marketed $300 million of the debt. “Issuers lately have approached the markets believing investors would take anything they served up,” said Holt Goddard, an analyst at Covenant Review LLC, a New York-based research firm. “Now investors are having better luck pushing back.” High-yield, or junk, debt is rated below Baa3 by Moody's and less than BBB- by Standard & Poor's. Companies have sold $262.2 billion of the bonds this year, the most on record, according to data compiled by Bloomberg. Average yields on the debt have fallen 1.39 percentage points this year to 7.81 percent, according to Bank of America Merrill Lynch index data. They touched 7.55 percent, the lowest since March 2005, on Nov. 9, the index data show. The debt has lost 0.3 percent this month.