For this report, Moody’s analyzed the covenant packages of 46 high-yield bonds issued by 24 North American automotive companies between January 2011 and February 2015. The rating agency measures bond covenant quality on a five-point scale, with 1.0 indicating the strongest investor protections and 5.0, the weakest.
“High-yield bonds from the North American auto industry offer weaker investor protections,” says Vice President — Senior Analyst, Timothy Harrod. “Worldwide growth in demand continues to drive investor appetite for bonds from automotive companies despite their offering less protection in all the risk categories we look at, except for liens and change of control.”
Aside from pockets of regional uncertainty, demand for vehicles continues to grow in North America and Asia, while macroeconomic conditions in Europe are stabilizing, Harrod says in “North American Automotive Bond Covenant Protection Remains Weak.” Despite relatively steady sales growth, leverage among auto suppliers remains lower than it was before the 2008-09 recession. Debt/EBTIDA for North American auto suppliers stood at about 3.3 times at the end of 2014, for example, supporting issuance of bonds with weaker-than-average investor protections.