By Karen Schwartz
High-Yield bonds: The looking glass
Cash is rushing into sub-investment grade debt amid low returns elsewhere. But as the market picks up, investors warn not all is what it seems
For high-yield investors, Mexican glassmaker
Vitro’s messy debt restructuring was a sharp
reminder of the perils of dabbling in sub-investment grade
paper. In April, the company finally put an end to the
wrangling over its $1.2 billion 2009 default.
A four-year legal battle was probably not what most
investors had in mind when they bought the paper. And as the
tussle dragged on, bond investors talked of charging a Vitro
premium for junk bonds.
Yet, despite its warning to investors, Vitro has not put
fund managers off investing in sub-investment grade debt. On
the contrary, junk-rated companies from Latin America have
roughly doubled their annual debt sales since the onset of the
global financial crisis.
Sub-investment grade issuance increased from $11 billion in
2007, to $20 billion in 2011 according to Dealogic data. The
enthusiasm may have waned somewhat in 2012, with $14 billion
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