CORPORATESSECTOR IN-DEPTH 20 MAY 2015TABLE OF CONTENTSAbout Moodys Covenant Quality Database and Covenant Scoring 2 Scores for the paper, packaging and forest products industry in line with North American average2Covenant protection deteriorating faster than industry average 3 Deterioration more pronounced in glass, metal and plastic packaging6PaperWorks Industries' covenant package was the strongest 6 HY-Lite are very common in glass, metal and plastic packaging7Sponsored deals slightly more prevalent than average 9 Appendix 10Moody's Related Research 12ANALYST CONTACTSEd Sustar 416-214-3628VP-Sr Credit Officer ed.sustar@moodys.comEdward Schmidt, CFA 212-553-0546 VP-Senior Analyst edward.schmidt@moodys.comAnastasija Johnson 212-553-1723 Analyst anastasija.johnson@moodys.comAaron Wong 416-214-3633Associate Analyst aaron.wong@moodys.comDanny Gao 416-214-3061Associate Analyst danny.gao@moodys.comEvan M Friedman 212-553-1338VP-Senior Covenant Officer evan.friedman@moodys.comMoody's High-Yield Covenant DatabasePaper, Packaging and Forest Product Covenants Eroding Faster than Average¯ The average North American paper, packaging and forest products covenant quality (CQ) score is weakening at a significantly faster pace than the North American average. While the industry's average covenant quality score is generally in-line with the North American average, it has deteriorated faster over the past four years than the North American average. The average CQ score for North American paper, packaging and forest products high yield bonds weakened 39% to 4.33 in 2014 from 3.12 in 2011, while the North American industry average weakened only 18% to 4.21 in 2014 from 3.55 in 2011. (Our CQ scoring scale ranges from 1.00, which indicates the strongest investor protection, to 5.00, which indicates the weakest.) The faster erosion holds true even when excluding high-yield lite (HY-Lite) deals and partially reflects the strength in the industry's end markets, which is increasing demand for its bonds and giving its issuers an edge when negotiating covenants.¯ The deterioration has been more pronounced in the glass, metal and plastics packaging (GM&P) subsector than the paper and forest products (P&FP) subsector. The scores for five of the six risk categories that we examine fell to the weakest level (greater than 4.20) for GM&P packaging companies in 2014. The weaker than average protection in the GM&P packaging subsector is consistent with investors' perception of less credit risk with an average coupon of 5.5% for GM&P packaging companies versus the 6.2% North American average.¯ The strongest and the weakest. PaperWorks Industries bonds issued in 2014 had the strongest covenant quality with a score of 2.21. Excluding HY-Lite deals, the bonds issued by Rayonier A.M. Products in 2014 had the weakest covenant quality, with a score of 4.57.¯ HY-Lite deals are significantly more common in the GM&P packaging subsector than the North American av...
