In a typical security, a company with stable cash flows and a heavily-franchised business model pledges assets like royalties into a special entity that is immune from the bankruptcy of the parent company. The money generated from that unit can fund business operations and pay investors. Additional protections, like stipulations that divert cash to pay investors if business goes south, can elevate the securities to investment-grade ratings.
Companies benefit from selling whole-business bonds, but money managers gain too: they get higher yields than they would earn from run-of-the-mill investment-grade corporate bonds, because the asset-backed securities are more complicated and take more time to analyze. The asset-backed notes are often rated in the BBB tier, among the lowest ratings for high-grade bonds.
An offering this month backed by the rights to play music from artists like Bob Dylan paid a 5.2% yield, while preschool chain Primrose Schools sold a bond that yielded 4.48%. In the unsecured bond market, the average BBB bond pays 3.2%.
“When you start to look at BBB rated whole business versus a BBB unsecured issue, it can look compelling,” said Philip Armstrong, a portfolio manager for structured investments at Invesco, which oversees $1.2 trillion. “There’s definitely considerable yield pickup.”
Higher yields have helped draw investors that mainly focus on corporate debt into the asset-backed market. That broader demand has made the securities easier to trade, said Dave Goodson, head of securitized fixed income at Voya Investment Management, which oversees $220 billion.
“It emboldens issuers to come to this market,” Goodson said. “Core buyers who have always been buyers have started to appreciate the better liquidity.”
This article was provided by Bloomberg News.