Leveraged Loans vs. High-yield Bonds?
Is there any career implications for covering Leveraged Loans or High-yield Bonds, in terms of early career learning and the work experience later in your career? Given the majority of loans are managed at smaller CLO shops vs. bonds more traditional LO, is there any implications there? If you had to pick one to cover, what would it be? Do most shops have analysts only focus on one or do they cover both? Is it possible to move between the two throughout your career or is it easy to switch between the two.
I can’t speak to the career implications but I can add some color on coverage at our shop. There is a lot of overlap between the two areas of leveraged credit particularly when it comes to research.
Taking a step back, earlier this year we were seeing a lot of new bond issues, particularly unsecured new issues, being pulled in lieu of the company issuing a loan. While we have seen larger issuers skew toward the bond market, rising interest rates have led to an increase in loan demand in recent months. This could drive traditional high yield borrowers to issue in the loan market if strong investor demand leads to more favorable rates. B/C of the interchangeable nature of hy bonds and loans there is often overlap in analyst coverage.
Our analysts often times cover loans and hy bonds of the same company because the credit metrics looked at for loans & hy bonds are essentially the same. In both cases, we’re worried about debt levels, interest coverage, FCF, etc so your analyst opinion will be specifically related to whether or not they like that particular issue. They will likely already have done a credit write up on the company and barring some change – the report is likely still accurate and can be applied to a company when looking at a loan issue or hy bond issue.
I believe it is very interchangeable b/c you’re looking at similar metrics when analyzing the creditworthiness of the issuer. Given the choice right now, I would probably lean towards levered loans b/c private credit is taking giant bites out of the HY market. Citrix is coming with a ~$14bn LBO of which I think $8bn is already off the table b/c private credit groups have gone in together to take out a large chunk of the issue. Long term – I think HY is the place to be.
Good info but Jesus Christ that was a pain to read
I was so baked when I wrote this, this comment still cracks me up.
lol I’d totally forgotten about this
From my recollection across the street, most firms have their HY and LL teams together/ sitting in same area. Skills learnt are extremely interchangeable and often you are looking at the same deal just at a slightly different cap structure lens. Honestly I would personally go for LL if had to choose between the two but that's more a personal preference.
What reasons do you have for preferring leveraged loans? You really don't think there is much of a difference?
Personally for me-loans usually sit at top of the capital structure or slightly below it. You have some protection from inflation and there seems to be a lot more money flowing into it from CLOs. There's more deals with loans than deals with bonds now (as unitranche becomes more popular.) Note issuances feel like they are getting smaller and CBOs are rare these days. Just feels like there's more opportunity in loans.
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