Triple Cs Under the Microscope
The dream of finding buried treasure has fascinated humans for centuries. Fortune seekers have scoured the earth’s lands and oceans to find diamonds and other precious stones hiding beneath the surface. It can be an arduous task to identify and isolate these commodities from the mineral ore encasing them.
In our view, the prospector’s task is similar to active investing in non-investment grade (also known as “high yield”) bonds and loans, particularly the corporate debt instruments that carry a “triple C” rating. This paper explores the potential rewards and pitfalls of investing in this space.
- A credit rating captures only one element of the risk profile of a corporate debt instrument.
- Where an investment is made in a corporate capital structure is a major consideration, but determining its treatment within the priority of payment queue in the event of a default is not always straightforward.
- Augmenting fundamental analysis with legal and structural analysis is critical to identifying attractive opportunities and fully understanding the risk/reward components of an investment.
Companies rated CCC due to elevated current leverage but with a strong growth profile & high cash flow generation can grow into their capital structure & reduce their debt over time.
This information is provided for illustrative purposes only. Opinions and views expressed constitute the judgment of Polen Capital as of October 2022 and may involve a number of assumptions and estimates which are not guaranteed, and are subject to change without notice or update. Although the information and any opinions or views given have been obtained from or based on sources believed to be reliable, no warranty or representation is made as to their correctness, completeness, or accuracy. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions. The views and strategies described may not be suitable for all clients. This document does not identify all the risks (direct or indirect) or other considerations which might be material to you when entering any financial transaction.
Past performance does not guarantee future results and profitable results cannot be guaranteed.