Why would a company voluntarily issue BB bonds instead of investment grade?
I heard on an investment podcast recently that more and more companies with good quality cash flows are now voluntarily issuing BB bonds instead of investment grade bonds, even though they are creditworthy enough to do so. Why would a company voluntarily do this? Wouldn't their coupon payments be higher for BB bonds?
More freedom issuing BB to peruse debt fuelled M&A, take leverage ratios higher and leverage your returns. If you start at BBB it doesn’t give you much headroom to raise debt, and a downgrade is not a good look for equity or bondholders.
Sounds like a top tier investment podcast from people who really know the industry!
Genuine question: How would a company *choose* how their bonds get rated? Is this even possible? Is it a case of taking the issuer rating + adding dumb covenants to weaken the bond rating so that it notches lower?
Could be a function of corporate structure as well. An OpCo senior secured debt backed by cash flow and assets is not rated the same as the HoldCo debt. The debt securities themselves can be rated differently based on seniority, time until maturity and like you mentioned, covenants etc. They aren’t necessarily choosing the rating, but can maneuver the debt to get the rating they desire from a CRA. The CRA can rate the corporate family, each part of the capital structure, and all the members within the corporate structure. The headline rating you see is typically the corporate family rating.
Amazing, thank you!
Look at Charter at the back of its quarterly earnings slide deck for a good example. They have IG debt down closer to the opco and high yield at the top
Thanks!
Could be to avoid more stringent IG covenants on leverage ratios, could be debt lower on the capital stack e.g senior secured bonds rated BBB but convertible notes rated BB, could be due to corporate structure e.g OpCo/HoldCo/FinCo having different ratings depending on where assets and cashflow live.
I'm not sure this makes much sense - would need to hear what was said specifically to understand the context. As others have said you don't choose your credit rating; however, you do choose your capital structure. Companies therefore can be choosing is to have more of a BB capital structure than a BBB. By this I primarily mean more leverage. Someone mentioned covenants and rank, but IG bonds typically have way looser docs than HY and are unsecured. This is to leave the assets unencumbered so in times of distress, the company is able to lever up their assets (example during covid, cruise industry). As to the reason why, I'd guess its just because the sponsors/board have decided they can get better returns on equity with a higher leveraged business. Within reason, IG really only matters in industries where there isn't all that much differential / competition is so fierce that cost of capital becomes a primary competitive driver (example aircraft leasing businesses).
Look at Charter, they can pick and choose where they want to issue IG vs HY bonds given each issuers' different position in the corporate structure; the IG bonds are issued out of the OpCo whereas the HY bonds are issued out of the HoldCo and are therefore structurally subordinate.
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