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What are High Yield Bonds and Leveraged Loans?

By High Yield Harry

Leveraged loans are syndicated loans made to borrowers that have a below investment grade credit rating. These are typically floating-rate instruments that are used in leveraged buyouts (LBOs). These riskier loans, made to borrowers with higher leverage or a weaker cash flow profile. These loans are typically first-lien, with a senior claim to collateral in an event of default.

High Yield Bonds are bonds issued by sub-investment grade companies. These bonds have "higher" yields to compensate investors for the higher risk profile. Unlike leveraged loans, bonds have fixed rate coupons. A below investment grade profile includes bonds rated BB+ or lower by S&P and Ba1 or lower by Moody's.

Credit Rating Scale Reference

Credit Rating Scales

Source: Wolf Street

View Full Credit Rating Scales →

Most Credit Analyst roles are at 1) Asset Managers with investment grade and high yield debt or 2) collateralized loan obligation (CLO) vehicles. The bulk of leveraged loans used to finance private buyouts are held by CLO managers.

Despite competition from private credit, the credit industry has been grown rapidly over the past 15 years, with more investment professionals.

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