Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Corporate Finance, March 2011
OVERVIEW
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 borrower.
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.
