High Yield Bond

What is a high yield bond?
A high yield bond is debt security issued by corporations with lower than investment grade ratings. It is a major component – along with leveraged loans – of the leveraged finance market.

Non-investment grade vs investment grade
Non-investment grade ratings are those lower than BBB- (or its equivalent), while an investment grade rating (or corporate rating) is BBB- or higher.

A non-investment grade rating is important as it suggests a greater chance of an issuer’s default, wherein the company does not pay the coupon/interest due on a bond or the principal amount due at maturity in a timely manner.

Consequently, non-investment grade debt issuers must pay a higher interest rate – and in some cases they must make investor-friendly structural features to the bond agreement – to compensate for bondholder risk, and to attract the interest of institutional investors.

Background - Public v private
Some background is in order. The vast majority of loans are unambiguously private financing arrangements between issuers and lenders. Even for issuers with public equity or debt, and which file with the SEC, the credit agreement becomes public only when it is filed – months after closing, usually – as an exhibit to an annual report (10-K), a quarterly report (10-Q), a current report (8-K), or some other document (proxy statement, securities registration, etc.).

Beyond the credit agreement there is a raft of ongoing correspondence between issuers and lenders that is made under confidentiality agreements, including quarterly or monthly financial disclosures, covenant compliance information, amendment and waiver requests, and financial projections, as well as plans for acquisitions or dispositions. Much of this information may be material to the financial health of the issuer, and may be out of the public domain until the issuer formally issues a press release, or files an 8-K or some other document with the SEC.
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