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High-Yield bonds: The looking glass

May 1, 2013

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

By Karen Schwartz

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 worth...

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“The crisis has been a setback for reserve diversification."

Jan Dehn, Ashmore Investment Management