The structure of high yield markets | Insight Investment

In our view, high yield credit continues to offer significant value given high absolute yields. In this paper we explore why the structure of high yield markets makes the asset class even more compelling.

• Higher rated, greater security: The average credit quality of high yield issuers has improved over time, with a significant portion of the market now rated BB. This reflects less debt and more financially robust companies. Additionally, there has been a trend towards securing issues with underlying assets, improving financial stability and offering higher recovery rates to creditors.
• Interest rate resilient: Corporate treasurers play a greater role in risk management, smoothing maturity profiles, reducing liquidity risk, and taking advantage of different funding pools. High yield issuers have capitalized on low interest rates, locking in funding levels well into the future, allowing them to weather interest rate spikes.
• Greater alignment with bond investors: High yield issuers prioritize business growth, aiming to increase cash flow and align their interests with those of high yield investors. In contrast, investment grade companies have historically issued debt to repurchase equity, leading to a misalignment with bondholders.
• Greater sector diversification: High yield issuers are generally more diversified by sector compared to investment grade credit, which is heavily weighted towards financials.
• The credit cycle creates opportunities: The size of the high yield market is influenced by the credit cycle, with bonds dropping into or rising out of the high yield universe as they are downgraded or upgraded. The primary use of proceeds for high yield bond issuance is for refinancing existing debt.
• Default risks are overstated: Default risk in high yield markets is generally overstated and can be effectively managed. Defaults tend to be heavily concentrated in CCC-rated issues.

This introductory page provides an overview of the key points discussed in the paper. For a deeper understanding, please refer to the full document.