How are high-yield investors gaining an advantage over market participants?

HY investors reclaim negotiating power

Amid this current market scenario, HY investors have been able to put pressure on issuers to make certain amendments in debt covenants as they became cognisant of issuers’ growing need to raise new debt from the market. After years of erosion seen in bond documentation, the current poor market environment has given investors the upper hand in negotiating debt covenants, although some still overlook the aggressive language in the indentures as long as the transaction comes at an attractive price or yield. In addition, over a decade of extremely cheap liquidity had meant that investors had little option but to accept the never ending assertive terms in the offering documents. However, as central banks across the globe began to reverse quantitative easing to fight inflation, investors have finally realised the opportunity to demand greater covenant security and rein in some of the exceptional amount of freedom given to borrowers in recent years.

Battered HY bond market — the road ahead

The HY market remains challenging and dysfunctional as companies with higher-risk profiles have had to put a hold on raising funds from debt markets and explore other alternatives as borrowing costs surge and investors ready for an economic slowdown. HY refinancing bond deals could also be negligible in the near term. Investors could continue to force HY issuers to modify covenants and mould these agreements to their benefit. That said, despite inadequate supply, the primary market will welcome high-quality issuers raising via secured paper, offering strong covenants and healthy recovery prospects at a single-digit yield.

How Acuity Knowledge Partners can help

Acuity Knowledge Partners is a leading provider of high-value research, analytics and business intelligence to the financial services sector. We support over 440 financial institutions and consulting companies through our specialist workforce of over 4,250 analysts and delivery experts across our global delivery network. We provide bespoke support to the debt capital market (DCM) teams of investment banks and advisory firms across the world through a wide range of solutions for corporate DCM, financial institutions group (FIG) DCM, sovereign, supranational and agencies (SSA) DCM, sustainable DCM and HY teams. Our team of experts regularly tracks macroeconomic factors affecting markets and provides end-to-end support, from deal origination to execution, including the most intricate financial analysis and aftermarket support. The DCM team also provides assistance with covenant analysis on different types of debt products by actively monitoring and capturing the covenants being incorporated by issuers in the offering circular, interpreting the ultimate purpose of the investments and how far they will benefit investors, and helping issuers raise funds.

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Acuity Knowledge Partners

Acuity Knowledge Partners

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We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points. https://www.acuitykp.com/