New York, October 25, 2012 -- The US oil and gas sector differs markedly in terms of investor protection, Moody's Investors Service says in a new report. While the covenant packages of high-yield independent oil and gas exploration and production companies (E&Ps) offer protection close to the average for all US high-yield non-financial corporates, those of midstream master limited partnerships (MLPs) provide the least protection among 31 corporate sectors and subsectors.
"Our review of bonds issued between January 2011 and October 2012 showed that those of US midstream limited partnerships have the worst covenant quality," says Andrew Brooks, Moody's Vice President and co-author of the report, "Midstream MLP Covenants Offer Least Investor Protection; E&Ps Near US Average." "Investor protection is weakest in the areas of restricted payments and liens subordination, reflecting these firms' focus on high shareholder distributions and externally financed growth."
An average score of 4.19 on Moody's five-point covenant quality scale places US midstream MLP covenant packages at the bottom among the 31 sectors included in Moody's High-Yield Covenant Quality Database. The average score of 3.45 for US E&Ps, on the other hand, is close to the 3.37 average for all US non-financial corporates. (Higher covenant scores indicate weaker investor protection.)
Nevertheless, US E&P covenant packages have strong and weak points, and deviated materially from the peer group in two main ways. "While US E&P bonds had the best average score for structural subordination, they had the worst average for protection against risky investments," Brooks says, "with the latter stemming from shareholders' desire to boost returns by giving management more flexibility in making their oil and gas investment decisions."
Moody's new report lists the scores on various factors for the bonds of 19 high-yield US midstream MLPs and 55 US high-yield independent E&Ps analyzed. The rating agency's High-Yield Covenant Database includes more than 1,000 global bond issues dating from 2010 and will be launched online soon, allowing investors to compare covenants across issuers, industries, rating categories and other factors.
Moody's research subscribers can access this report at http://www.moodys.com/research/Moodys-High-Yield-Covenant-Database-Midstream-MLP-Covenants-Offer-Least--PBC_146695.
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Andrew Brooks Vice President - Senior Analyst Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Steven Wood MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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