Where is the high yield upside?

CREDIT

Equity-like returns from the high yield market may be history if certain deal terms become the norm, according to Mitch Reznick and Fraser Lundie, co-heads of Hermes Credit.

Amid strong investment flows, record issuance and reduced default risk, something valuable is being lost in the most recent of high yield credit booms. In a quiet evolution of the market, gradual changes in bond documentation are threatening the equity-like returns at half the volatility investors seek from the asset class. The iterative erosion of call protection, which shields investors from interest-rate movements before a bond’s call date, is among the most dramatic changes in this structural creep. Call protection, which takes the form of a non-call period, guarantees a bond cann...