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Junk Bonds' Eroding Returns Don't Discourage Buyers

Old rule of thumb shows investors arent getting paid for risk.

By Sally Bakewell and Sridhar Natarajan, Bloomberg | Updated on August 01, 2017

Bond buyers have a rule of thumb that says be wary when the coupon on a new debt sale slips below the issuer’s leverage. It’s an indicator that investors aren’t being paid enough for the risk they’re taking on.

This adage is being tested anew amid a bubble-like market, as issuers wear down buyers with deals that they’d spurn in almost any other era. One recent example is July’s $500 million sale from HD Supply Waterworks. The water and wastewater company priced the debt beneath its 6.3 level of leverage, which measures debt as a multiple of earnings.

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