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Types of Bonds

Who Issues High-Yield Bonds?

Over the last decade, diversity has grown among issuers that tap the high-yield market. In the late 1980s, high-yield bonds were generated by a few participants and heavily used to finance merger and takeover activities. Today, the market has broadened to include many dealers and issuers with diverse needs. Issuers of high-yield bonds can be grouped into the following categories:

“Rising stars” are emerging or start-up companies that have not yet achieved the operational history, the size or the capital strength required to receive an investment-grade rating. These companies may turn to the bond market to obtain seed capital. Although start-ups can be risky, credit rating agencies consider their lack of a track record when issuing ratings. So a start-up company that qualifies for a single-B rating should have about the same risk level as a going concern with the same rating. In some cases, bonds may offer the first chance to participate in start-ups, before these companies offer their initial public offerings (IPOs) of stock to the public. Eventually, many rising stars grow to become larger companies with top credit ratings.

“Fallen angels” are former investment-grade companies that are experiencing hard times, which cause their credit to drop from investment-grade to lower ratings. If their prospects improve, some fallen angels can regain their investment-grade status.

High-debt companies (which may be blue chip in size and revenues) leveraged with above-average debt loads that may cause concern among rating agencies. Companies refinancing debt sometimes turn to high-yield bonds to pay down bank lines of credit, retire older bonds or consolidate credit at attractive rates of interest. Companies also turn to the high-yield bond market for capital to fund acquisitions or buyouts, or to fend off hostile takeovers.

Leveraged buyouts (LBOs) create a special type of company that typically uses high-yield bonds to buy a public corporation from its shareholders, often for the benefit of a private investment group that may include senior managers. Some corporate assets or divisions may then be sold to pay down the debt.

Capital-intensive companies turn to the high-yield market when they are not able to finance all their capital needs through earnings or bank borrowings. For example, cable TV companies require large amounts of capital to acquire, expand or upgrade their systems.

Foreign governments and foreign corporations, often less familiar to domestic investors, may rely on high-yield bonds to attract capital. Bonds issued by foreign entities have not been addressed in this booklet in any detail and are not included in the statistical tables throughout. Also, it should be noted that there are other risks—currency risk and political risk—that are unique to bonds issued by a foreign government/corporation and have not been covered in this booklet.

The Top 10 Industries Issuing High-Yield Corporate Bonds in 2003*
Rank Industry Share of bond market value
1. Manufacturing 31.9%
2. radio and Television 11.0%
3. Electric Service 7.7%
4. personal & business services 4.7%
5. leisure 4.4%
6. natural resources 4.3%
7. Telephone Communications 3.7%
8. transportation 3.5%
9. retail 3.4%
10. wholesale 3.0%

* Excludes issues with maturities of 1 year or less and all CDs

Source: Thomson Financial Securities Data


All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.