High Yield Bonds
High Yield Bonds can offer substantial coupons when appropriately selected.
High yield bonds are debt securities issued by sub-investment grade rated borrowers and usually pay a fixed rate of interest. Typically they will be unsecured and in the event of a default or liquidation, investors in a high yield bond will rank behind all secured lenders. They will be repaid out of whatever liquidation proceeds remain after all the secured lenders have been repaid in full. As a result, high yield bonds will typically achieve lower levels of recovery than secured debt following default or liquidation.
However, in the last few years, issuance of senior secured high yield bonds has gained popularity. A senior secured high yield bond shares in the same security pool as a senior secured loan and for that reason is expected to achieve similar levels of recovery. Some of these bonds have been structured to pay a floating rate of interest – such bonds are referred to as “senior secured floating rate notes”.
High yield bonds offer investors a higher duration asset than a Secured Loan paying a higher coupon and are securities that are easily transferrable through established clearing systems.