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High Yield Bonds - An Issuer's Guide (US Edition)

December 2016
Mayer Brown Book
The US high-yield market has experienced tremendous turbulence in the past few years. Between 2009 and 2015, the US high-yield market rose 180%, and bond terms became increasingly “issuer-friendly”. Examples of this trend include weaker call protection, change of control provisions requiring a ratings down-grade, and higher flexibility for issuers to incur additional debt and/or make restricted payments. Second lien secured deals also became increasingly common as investors accepted greater risk in response to higher yields. Accompanied by rising oil and gas prices, investors poured money into energy issuers, with energy companies becoming approximately 15% of the US high-yield market.

The significant drop in oil prices in 2014 severely tested the US high-yield market. By the end of 2015, more than 15% of high-yield bonds were at risk of default. For the preceding 12 months as of October 31, 2016, default rates had risen to around 5.6% in the United States. Since 2014, over $107 billion of high-yield bonds have gone into default. Many of those issuers that avoided default did so by negotiating debt exchanges to reduce leverage or interest exposure or to extend maturities. Many of these debt exchanges were highly coercive and revealed to many investors their vulnerability to looser structures, often resulting in significant structural subordination. Other than this flurry of debt exchanges, the market has seen only sporadic or highly subdued activity in the second half of 2015 and the first half of 2016. The US market has now become fairly bifurcated, with energy issuers generally facing tighter covenants and higher spreads. Non-energy issuers, deals backed by strong private energy sponsors and companies with strong fundamentals generally continue to enjoy looser covenants and lower spreads.

Given such volatility, we thought it would be a good time to launch the first US Edition of our Guide.

Please click on the link below to view a PDF copy of our High Yield Bonds - An Issuer’s Guide (US Edition) or . This Guide addresses the core elements of high-yield debt and aims to provide existing and new issuers with a reference tool to help them understand and navigate high-yield covenant packages, structures and deal execution in the United States. The Guide is primarily intended for first-time issuers of high-yield bonds. We, therefore, did not assume that users of the Guide would already have prior experience with or even a basic understanding of high-yield bonds, and we have explained the relevant high-yield bond concepts in simple non-technical terms, wherever possible. However, we still hope that other market participants (such as underwriting banks, law firms or other financial and legal advisers) will also find the Guide interesting and helpful.
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