Senior Secured, High Yield and Perpetuals, what types of debt are we talking?
Senior Secured bonds
The senior secured bond market is part of the wholesale corporate bond market. Senior Secured borrowings can be issued as a loan (also known as bank loans) or as a bond (and sold in the high yield bond market).
They are typically senior, which means they are secured on the assets of the company and they rank ahead of unsecured borrowings and equity. This asset backing offers a degree of capital and structural protection for investors.
Senior Secured bonds are typically structured, arranged and administered by one or several commercial or investment banks. Senior secured corporate bonds offer a fixed rate of interest. A coupon is received by investors on a semi-annual basis with the principal paid at maturity.
It is also common for very large corporates such as AT&T and Tesco to issue senior unsecured bonds that while unsecured are for all intents and purposes the primary form of borrowing meaning that there is very little, if any secured borrowing ahead of the bonds. This means the risk is for all intents and purposes similar to that of senior secured bonds.
Compared to retail bonds issued on the London ORB, in addition to security over the assets of the company senior secured bonds tend to have shorter maturities typically 5–7 years, and in general have higher rates of interest or yields.
Senior secured bonds meet investor requirements for a combination of attractive returns with relatively short-medium maturities, which also mitigates the risk of rising interest rates.
High Yield Bonds
The high yield bond market is often used to describe both secured and unsecured bonds but when people think of high yield bonds they are often referring to unsecured bonds that are subordinated to senior secured borrowings (i.e. rank lower in terms of security).
Unsecured bonds still have a guarantee from the parent company issuing the bond so the company is still contractually required to pay the interest and capital back on the bonds unless the company doesn’t have the financial resources to do so.
In terms of risk unsecured high yield bonds are generally higher risk than senior secured bonds but less risky than equities (equities rank behind all borrowings). They typically offer higher interest rates than other types of bond, and they have the potential for capital appreciation in the event of a rating upgrade, an economic upturn or improved performance at the issuing company. The maturities of these bonds can range from 5 to 10 years or more.
Also, because the high yield sector generally has a low correlation to other segments of the fixed income market (Goverment bonds, investment grade bonds) along with less sensitivity to interest rate risk, an allocation to high yield bonds may provide portfolio diversification benefits.
In addition, high yield bond investments have typically and may continue to offer equity-like returns over the long term with less volatility.
Hybrid securities combine features of both traditional corporate bonds and shares. For example, hybrids pay coupons like a bond but can also be converted into shares of the issuing company after a specific event (e.g. a company listing, a share price threshold being reached, or another type of corporate event or mechanism outlined in the investment terms).
Examples of hybrids include convertible bonds, preference shares (that convert into ordinary shares) and some types of perpetuals (‘perps’). The prices of hybrids can behave differently depending on whether they are structured more like bonds or more like shares.
As with all investments your capital is at risk. WiseAlpha members purchase Notes which are fractions of individual corporate bonds.
See full Risk Statement at www.wisealpha.com