![]() They come in the form of low-interest term loans and revolvers/commercial paper.īank loans are the most senior in a company’s capital structure. Loans to investment-grade firms usually come from traditional banks within the corporate banking division. Below, you can see that the yield spreads (the “extra” interest above US Treasury yields) are always higher for speculative-grade bonds than for investment-grade bonds:ĭefault Spread (Source: Damodaran) Investment-Grade Debt (BBB/Baa+)īefore getting into the specifics of leveraged finance, let’s briefly look at investment-grade debt. This enables those firms to borrow at very low interest rates. S&P Credit Rating System (Source: S&P Global)Īs you would expect, investment-grade firms are far less leveraged (lower debt/ EBITDA) and have higher interest coverage (EBIT/Interest):Ĭredit Financial Metrics (Source: Moody’s)Īs a result, defaults and bankruptcies are very rare for investment-grade firms. The table below from S&P Global shows where the investment-grade/speculative-grade divide occurs across the credit ratings spectrum: Speculative-grade bonds are called “junk” or “high yield” bonds. Bonds: Fixed coupon-paying securities publicly registered with the SEC that are held and traded by institutional investors.Speculative-grade loans are called “leveraged loans.” Loans: Term loans and revolvers issued privately by banks and institutional investors.Speculative-grade loans are called “leveraged loans.” Speculative-grade bonds are called “junk” or “high yield.” One thing both investment-grade and speculative-grade firms have in common is that they can access two distinct debt structures: Speculative-grade debt is the world of leveraged finance. Speculative-grade debt (BB/Ba or below): Debt issued by highly leveraged companies and thus a riskier credit profile.Investment-grade debt is considered quite safe and default risk is very low. Investment-grade debt (BBB/Baa credit rating or above): Debt issued by companies with a strong credit profile.In the world of debt financing, there are two kinds of debt: ![]() ![]()
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