Do you know how mainstream high yield is?

George Flynn, Global High Yield Bond Fund Manager

High yield bond issuers are everywhere, with their products and services used daily, many of which you may not even be aware of. Despite this, high yield as an asset class is often left out of the limelight – equities often steal the headlines and the investment grade debt universe is c.6-7x that of high yield.

“Fred wakes up and turns his bedside lamp on – his electricity is supplied by companies like AES, HASI EDF and Centrica. He hops into the shower – the water is supplied by Thames Water. He eats his Weetabix produced by Post, a listed $12bn enterprise value company. He checks the train times and news on his phone with the sensors provided by AMS Osram, his phone line likely supplied by the likes of Vodafone, Talk Talk, Iliad, or MasMovil.

He then drives his car to the train station – Fiat, Renault, Jeep are all high yield issuers, while his tyres are made by Good Year or Schaeffler. Against his better judgement, Fred gets a coffee from a Selecta vending machine and catches his train, whose carriages have been made by Bombardier. He walks past shops (Footlocker, Gap, B&M, Macy’s, Marcolin, Saks, Takko) and restaurants (Wagamama, Pizza Express) before entering his office, taking the lift to his floor (Thyssenkrupp Elevators), logs into his PC to be met with pop up telling him the security software needs to reboot his PC (CrowdStrike, Seagate).”

High yield issuers are all around us

Fred’s morning is far from unusual. But at every point of his journey, he has enjoyed products and services provided by high yield companies.

So far, the takeaway is that high yield companies are a diverse and significant part of your personal economy and the world economy. The next thing to take away is that high yield is where companies are born and retire.

The life cycle of high yield companies

As an asset class high yield is less expensive than equity to an issuer but generally more expensive than a large-listed investment grade company can borrow at. Small companies often come to the high yield market looking to fund the next phase of their growth with the hope of becoming large enough to become listed on a stock exchange, making their owners fabulously rich; allowing them to borrow at cheaper Investment grade levels. A great example of this is Uber – you know Uber, right?

Unfortunately, not all companies will make it – roughly 3.3% of high yield bond issuers will default per year.* But as a high yield bond holder, lenders often demand security over the stock and assets of the company they are lending to. In these cases, the high yield lenders become the new equity owners of the business and can either liquidate the assets to recover the money they have lent or attempt to recover this through running the business. This is different to equity whose claims are generally subordinated to those of debt holders. Other high yield companies may start off small and use the borrowed funds to make acquisitions and grow their business by buying others.

Private equity firms may purchase companies in industries where they see the potential to increase market share, increase margins, reduce costs and earn themselves hefty returns on equity by borrowing funds from the high yield market. The risk here is management overreach or enter a market that is much more competitive than they thought. Similarly private equity firms may discover that the promised cost savings, margin and market expansion are harder to achieve.

At the other end of the spectrum, you have large, sometimes, huge companies typically listed on major stock exchanges who are well established and have made a conscious decision to use debt to leverage their equity returns and are happy to have a high yield credit rating.

Finally, you have businesses which are mature, in their sunset years and have over time seen their revenue growth slow, their margins stabilise or decline and have moved from investment grade to high yield.

What to look out for in high yield

The final and most important takeaway is to describe, in a very broad sense, what we look for when analysing high yield issuers:

• Focus on quality – “Cashflow is King”

• Use ESG to add value – “Good things happen to good companies.”

• Global approach –“Emerging Markets offer diversity and quality”

• High conviction – “best ideas win”

• Diversity – “diversification reduces risk of ruin”

The securities referenced are for information only and should not be deemed as a recommendation to buy or sell.

US High yield Issuers https://www.moodys.com/web/en/us/about/insights/data-stories/us-corporate-default-risk-in-2025.html