The investor protection provisions of Canadian high-yield bonds are deteriorating, and bond covenant quality is more closely resembling the U.S. market, reports Moody’s Investors Service.

The rating agency says, in a new report, that Canadian high-yield bond covenants have deteriorated over the past four years; and, the gap between Canadian and U.S. bond covenant quality is narrowing.

“While Canadian high-yield bonds are still more protective than those issued by U.S. companies, the covenant quality of Canadian high-yield bonds is following the same negative trend we have seen in the U.S.,” says Ed Sustar, vice president and senior credit officer at Moody’s. “In terms of investor protections, Canadian and U.S. high-yield bonds are converging.”

Moody’s measures bond covenant quality on a five-point scale, with 1.0 representing the strongest investor protections and 5.0, the weakest. It says that its average covenant quality score for Canadian high-yield bonds is sitting at 3.71 this year through November, compared with 3.55 in 2013. For the U.S., the score is 3.89 so far this year, up 3.74 last year.

The rating agency says that covenants on Canadian high-yield bonds weakened across three of the six key risk areas that it assesses as part of its covenant scoring. It says that the score for the “liens subordination” component deteriorated the most this year, declining to 3.86 through November from 3.12 in 2013. And, it says that the scores for the “debt incurrence” and “change-of-control” components both weakened modestly.

Moody’s also reports that Canadian high-yield bonds sold in the domestic market have offered slightly better investor protections than those sold to U.S. investors over the past four years. It says that the average covenant quality of bonds sold in Canada was 3.36, compared with 3.53 for those sold in the U.S.

“Canadian high-yield bonds sold domestically scored stronger across most of our key risk categories,” Sustar says. “Nonetheless, we expect the credit quality between domestic and cross-border bonds to converge as the domestic market develops.”