New high yield issuance can vary greatly from year to year depending on economic and market conditions, typically expanding along with economic growth, when investors’ appetite for risk often increases, and waning in recessions or market environments, when investors are more cautious. through the 1980s and 1990s, the high yield sector has since grown significantly around the globe in terms of issuance, outstanding securities and investor interest. The high yield market has since evolved, and today, much high yield debt is used for general corporate purposes, such as financing capital needs or consolidating and paying down bank lines of credit. Investment banks, led by Drexel Burnham Lambert, launched the modern high yield market in the 1980s by selling new bonds from companies with below-investment grade ratings, mainly to finance mergers and acquisitions or leveraged buyouts. Until the 1980s, high yield bonds were simply the outstanding bonds of “fallen angels” – former investment grade companies that had been downgraded below investment grade. While agency credit ratings define the high yield market, and many investors rely on these ratings in their portfolio guidelines, investors may also conduct independent credit analysis of company fundamentals and other factors to form their own conclusions about a security’s risk of default. These issuers must therefore pay higher coupons to attract investors to buy their bonds. Those issuers considered to have a greater risk of defaulting on interest or principal repayments are rated below investment grade (see Chart 1). Issuers are rated on their ability to pay interest and principal as scheduled. Credit rating agencies evaluate bond issuers and assign ratings.
0 Comments
Leave a Reply. |