Public Fixed Income

The Case for Investing in Senior Secured Bonds

May 2022 – 9 min read

From capital structure seniority and high historical recovery rates, to lower interest rate sensitivity and compelling yields, global senior secured bonds offer a number of potential advantages.

Why Senior Secured Bonds?

The global senior secured bond market is a sizable sub-component of the broader global high yield bond asset class and, as the name indicates, comprises bonds that are senior and secured in the capital structure. Senior secured bonds reside at the top of a company’s capital structure, ranking first in line for repayment in priority over other liabilities and shareholder interests. They also benefit from security interests in various firm assets, which can include tangible assets—such as property, plant and equipment, inventory and contractual claims—as well as intangible items like software and trademarks. Ultimately, this means that if a company defaults on its debt obligations, senior secured bondholders are first in line for any repayments, in priority over other creditors, and also stand to benefit from their control (via the security interests) in the assets that are critical for running the business.

As a result, senior secured bonds have historically offered higher recovery rates than unsecured bonds. For example, from 1987 to 2021, the average recovery rate for defaulted senior secured bonds was 61.5%, compared to 47.4% for senior unsecured bonds and 27.9% for subordinated debt.1 The success of the senior secured bond market has been such that over the past five years it has increased in size by roughly 70% to over $500 billion, equivalent to about one third of the global high yield bond market.2 This is a broad, deep and well-diversified market that provides ample options for an active global high yield manager, with a rich opportunity set to generate sustainable alpha.

Why Now?

Navigating a Challenging Environment
It has been an extremely challenging and volatile period for most financial markets this year, driven by elevated inflationary pressures, hawkish central bank activity with expectations of rising interest rates and tightening financial conditions, geopolitical tensions with Russia’s invasion of Ukraine, and the ongoing disruption from COVID-19, particularly in key regions such as China. Like other segments of the global fixed income markets, senior secured bonds have not been immune from the pressure stemming from the rise in government bond yields around the world.

Of note, however, senior secured bonds have outperformed most other global bond markets year to date. This is largely due to the asset class’ shorter duration profile (a measure of interest rate sensitivity) and high coupon levels, which have created an attractive alternative to the higher-quality, more interest rate sensitive segments of fixed income.

1. Source: Moody’s Investors Services Annual Default Study. As of February 8, 2022.
2. Source: ICE BofA BB-B Global High Yield Secured Bond Index, ICE BofA Non-Financial Developed Markets High Yield Constrained Index. As of April 30, 2022.

22-2207709

Want to read the full article?

View PDF

Craig Abouchar, CFA

Managing Director

Kelly Burton

Managing Director

Chris Ellis

Managing Director

The document is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This document is not, and must not be treated as, investment advice, investment recommendations, or investment research.

In making an investment decision, prospective investors must rely on their own examination of the merits and risks involved and before making any investment decision, it is recommended that prospective investors seek independent investment, legal, tax, accounting or other professional advice as appropriate.

Unless otherwise mentioned, the views contained in this document are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Parts of this document may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this document is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any forecasts in this document are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Any investment results, portfolio compositions and/or examples set forth in this document are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this document. No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments.

Investment involves risks. Past performance is not a guide to future performance. Investors should not only base on this document alone to make investment decision.

This document is issued by Baring Asset Management (Asia) Limited. It has not been reviewed by the Securities and Futures Commission of Hong Kong.