Originally published in Blakes Bulletin on Corporate
Finance, March 2011
High-yield bonds are debt securities with below-investment-
grade ratings. Although high-yield bonds entail greater credit risk
than government bonds or bonds of more highly rated corporate
issuers, this is offset by a comparatively higher interest coupon.
The high-yield bond market emerged in the United States in the
1980s as a means of financing leveraged buyouts. Since then, while
high-yield bonds have continued to be popular for financing
acquisitions, they have been issued for a wide variety of purposes,
including by many Canadian companies.
Historically, Canadian companies raising high-yield debt have
primarily tapped the U.S. market. However, starting in mid-2009, a
significant number of Canadian companies have elected to issue
high-yield bonds denominated in Canadian dollars to Canadian
investors, with 14 deals raising more than C$3.4-billion in
proceeds getting done in 2010. The Canadian highyield bond market
is expected to continue to grow as Canadian investors seek
attractive yields, particularly since the income trust market
dissolved in January 2011. Canadian companies may also opt to issue
Canadian-dollar high-yield bonds due to the limited availability of
long-term bank debt, or because of a preference for raising debt in
their local currency.
Most Canadian-dollar high-yield bonds issued since mid-2009 have
consisted of senior unsecured fixedrate debt, although the market
has also included senior secured and senior second-lien secured
offerings. Most of these high-yield issues have also benefited from
additional credit support in the form of subsidiary and/or parent
guarantees, although at least one holdco transaction has closed
without any subsidiary guarantees. The maturities of
Canadian-dollar high-yield bonds have ranged between five and 10
years, with the most common maturity to date being seven years
subject to a three- or four-year non-call period.
High-yield bonds could also be offered using a variety of other
structures that have already been utilized in the United States,
for example, as senior subordinated, floating-rate, or PIK
(pay-in-kind) debt, depending on an issuer's needs and the
demands of the market.
High-yield bond covenants in Canada, as in the United States,
are mainly incurrence-based and do not include financial
maintenance covenants. As a result, they are able to provide
issuers with a significant degree of flexibility to operate and
expand their businesses, compared with bank debt, which typically
imposes one or more financial maintenance covenants on a
High-yield bond covenants are also designed to give bondholders
a number of meaningful protections. Highyield bonds normally
include covenants that limit the ability of the issuer and its
subsidiaries to distribute cash or other property to shareholders
and junior creditors, incur additional debt, make investments,
incur liens, sell assets, enter into transactions with affiliates
and take certain other actions that could impair the issuer's
ability to service its bonds. High-yield bond covenants also
generally require the issuer to provide financial and other
information to its bondholders at regular intervals.
High-yield bond covenant packages are normally extensively
negotiated, and those in Canada have tended to be less uniform from
deal to deal than those in the United States. An important
objective for any issuer and its financial and legal advisers in
tailoring a high-yield bond covenant package is to balance the goal
of investor protection and hence marketability with the
issuer's specific business needs and objectives.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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