What is a high-yield bond?
A high-yield bond is debt issued by a company rated below investment grade — below BBB- from S&P and Fitch, or below Baa3 from Moody's. The rating agencies judge these issuers more likely to default, so investors demand a higher coupon to hold the paper. That extra yield is the definition: high yield is simply the market's price for higher credit risk.
The older nickname is "junk bond," a label that stuck from the 1980s. The two terms mean the same thing; "high yield" is the polite, market-standard usage. Above the line sits investment-grade debt; below it sits the high-yield universe that funds most leveraged buyouts and growth-stage borrowers.
High-yield bonds are a core financing tool for sponsors. Alongside leveraged loans, they let an acquirer raise large, long-dated, fixed-rate debt without the floating-rate exposure of a term loan — at a coupon that reflects the leverage and risk of the business.
How high-yield bonds work
Mechanically a high-yield bond looks like any corporate bond, with features tuned for riskier credits.
- Fixed coupon. The bond pays a set rate, usually semi-annually, that does not move with SOFR — attractive to issuers wanting certainty and to investors wanting yield.
- Bullet maturity. Principal is repaid in a single payment at maturity, typically five to ten years out, rather than amortizing along the way.
- Call protection. The issuer cannot redeem the bond early for a set non-call period; after that, redemption requires paying a declining call premium. This protects the investor's yield.
- Incurrence covenants. Unlike loans with maintenance tests, bond covenants are typically incurrence-based — they bite only when the company takes an action like issuing more debt or paying a dividend, not continuously.
High yield versus leveraged loans
Sponsors choose between high-yield bonds and leveraged loans, and often use both. Bonds bring fixed rates, longer tenors, and looser incurrence-style covenants, but carry call protection that makes early refinancing expensive. Leveraged loans float over SOFR, can be prepaid freely, and are easier to reprice when markets improve, but expose the borrower to rising rates.
The mix depends on rate views, the desired maturity profile, and how much flexibility the sponsor wants to refinance later. A common structure pairs a floating-rate term loan with a high-yield bond, blending repayment flexibility against rate certainty across the capital stack.