Moody's has come out with research on Oil and Gas bond covenants and has come to the conclusion that MLPs offer the least investor protection. (Finanzen)
"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."
The Moody's research can be found here. (You'll need a subscription or $550.)
The MLP focus on paying out earnings leaves those firms in a perpetual refinance cycle. That is, they cannot self-fund because they distribute their earnings to their investors. This is the paradox and the Achilles Heel of MLPs. The very thing that makes them attractive to yield-starved investors is what makes them vulnerable to sharp (and pro-cyclical) declines.