Best Lawyers Near You in Frankfurt/Main, Germany for High Yield Products

High yield products are non-investment grade bonds such as corporate bonds, treasury bonds and municipal bonds. High yield products are - due to the potentially greater risk involved - rated below BBB- or Baa3 by the established credit rating agencies Standard & Poors, Fitch and Moody’s and typically offer higher coupon rates than conventional bonds. They are also referred to as “junk bonds”.

Issuers of high yield bonds are typically former investment grade companies with high debt ratios or emerging companies seeking working capital for expansion or to fund acquisitions. In most cases the bond indenture is governed by New York law, whilst the collateral securities agreements are governed by the law of the jurisdiction in which the securities are placed. Whereas in the past high yield bonds were mainly used to finance mergers and acquisitions or leveraged buyouts, today most high yield debt is used for general corporate purposes. They are usually issued with a term of 5 to 8 years and are often callable after two years. In Germany, the amendment to the German Bond Act in 2009 opened the market for high yield bonds under German law. High yield bonds can be secured or unsecured, and, in case of existing financial debt, the notes are more attractive if they are pari passu to the existing debt and share the same securities. Covenant packages may limit the issuer’s ability to incur additional debt and pay dividends or make distributions to other holders of securities.

High yield bonds offer investors a number of potential benefits, coupled with specific risks. In general, they offer significant greater yields compared to investment-grade bonds at any given time. Since the issuers of high yield bonds are considered less likely to make interest payments than issuers of investment grade corporate debt and investors are being asked to assume this risk, high yield bonds tend to come with higher coupon rates, which on the other hand, can generate additional investment income. However, high yield bond payments are dependent on the issuer’s ability to generate cash flow as well as its creditworthiness, which can be impacted by unforeseen events. In addition, they high yield bonds are more likely to have call provisions, which means they can be redeemed or paid off at the issuer’s discretion prior to maturity.