Corporate debt glossary: A look at some terms
New York – Business borrowing has boomed since the economy emerged from the Great Recession, and investors have been more than happy to lend to companies.
Thanks to their surging profits, the vast majority of businesses have been able to make their debt payments on time. But the corporate debt market has grown so big that critics worry it’s approaching a dangerous level. Critics also see signs of loosening lending standards that they say could lead to bankruptcies and losses if the economy turns downward.
The corporate debt market can be difficult for the lay investor to parse, with lots of technical definitions. Here’s a look at some of the terms:
■ Corporate bond. When a company sells bonds in the market, it’s doing so to borrow. It might want to expand, buy other companies or pay dividends to its owners. When investors buy a bond, they are giving the money to the company to use, and the company promises to repay the loan at a set time. Those investors can then, in turn, sell the bond to someone else or hold onto it.
■“Investment grade.” Just like someone trying to get a loan to buy a home or a car, companies have credit ratings too. When a company has strong finances and credit-rating agencies believe it has a relatively low risk of a default, they give a high, or “investment,” grade. The top rating at S&P is “AAA,” and at Moody’s, it’s “Aaa.” The lowest level of investment grade at S&P is “BBB,” while it’s “Baa” at Moody’s.
■ “Junk grade.” When credit-rating agencies believe a company carries a higher risk of eventually defaulting, it assigns a “speculative grade.” Colloquially, this is known as “junk” status. At S&P, a rating of “BB” or lower is junk, while at Moody’s, a grade of “Ba” and below is speculative.
■Leveraged loans. These are types of loans made to companies that already have lots of debt or weak finances. These loans often have conditions built in to protect lenders, which are called covenants. When demand for leveraged loans is high, borrowers can argue for fewer restrictions, and these are known as “cov-lite” deals.
■Yield. This is how much a bond pays its holders. Junk bonds pay higher yields than high-quality bonds issued by companies with strong credit ratings to make up for the increased risk. That’s one reason why those in polite company tend to use the term “high-yield bonds” instead of junk bonds.