The Investment Case for Senior Secured Bonds
In an environment of higher rates and uncertainty, the combination of seniority and security, relatively lower interest rate sensitivity, and high current yields presents a compelling case for senior secured bonds.
The Case for Senior Secured Bonds
Senior secured bonds are high yield bonds that are both senior and secured in the capital structure. This means that if a company defaults on its debt obligations, these bonds are the first in line to be repaid, ahead of junior, or subordinated, debt. They are also secured by collateral, which can comprise a range of assets including real estate, equipment, and vehicles, as well as intangible items such as software or trademarks.
As a result of these characteristics, in the case of bankruptcy or default, senior secured bonds have historically offered a higher recovery rate than unsecured bonds. For example, from 1987–2022, the average recovery rate for defaulted senior secured bonds was 61.2%, compared to 47.1% for senior unsecured bonds and 27.8% for subordinated debt.1
1. Source: Moody’s Investors Services Annual Default Study. As of March 13, 2023.
