How is high yield bond analysis different from investment grade?

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AcadiFi · Accepted Answer

High yield (HY) credit analysis shifts focus from default avoidance to recovery value, liquidity runway, and covenant protection. The probability of default is materially higher, so upside/downside asymmetry matters much more than spread levels alone.

Key differences from investment grade:

1. Leverage focus: IG lives at 2-3x net debt / EBITDA; HY lives at 4-7x. Interest coverage of 2-3x is normal.
2. Covenant package: HY relies on incurrence covenants (restrictions triggered by actions) rather than maintenance covenants (tested each quarter). Analyze indenture carefully for debt, lien, and restricted payment capacity.
3. Seniority and structural priority: IG analysis often treats the company as a monolith; HY analysis maps debt by security (1L, 1.5L, 2L, unsecured) and subsidiary guarantees.
4. Recovery modeling: estimate enterprise value in distress (e.g., 6x trough EBITDA) and waterfall through the capital stack. A 1L bond at 4x attachment might recover 90%; unsecured at 7x attachment might recover 30%.
5. Liquidity runway: 12-24 months of liquidity (cash + revolver availability) is critical. Maturity wall matters more than stated yield.

For Clarion Telecom bonds trading at 78 with 9% coupon and 3-year duration, the question is not just the 14% yield but whether recovery in a default scenario justifies the price. Always run a three-scenario recovery: base (refi), downside (distressed exchange), severe (bankruptcy).

How is high yield bond analysis different from investment grade?

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