It’s a common question among fixed income investors: why are some bonds called early? Insight Investment’s1 high yield team answers this and explores some of the opportunities it can create.
Issuers call bonds for many reasons, many of which are easy to understand. These include:
- Changing the business model;
- de-leveraging, using cash generation or asset sales to reduce the issuing company’s debt burden;
- accessing more attractive financing elsewhere;
- securing a cheaper coupon on new debt;
- responding to a change of control; and
- refinancing debt as major business milestones are achieved.
The last of these is the most common reason for debt to be called early but it is also the least understood by investors. Why do high yield issuers call debt early, paying a premium, and even doing so to refinance at higher interest rates, when they could simply leave the bond to run to its final maturity?
Generally, a high yield company is seeking to make a return on equity well in excess of the underlying rate of economic growth over a five-to-seven-year time horizon. The aim is generally to create a larger, more profitable company that can then be sold at the end of this period, achieving a profit for the equity owner.
There are many ways that a business can seek to achieve high rates of growth. Growth can come from expanding existing operations; for example, opening new stores or production facilities, buying a competitor or assets from a competitor to accelerate the expansion, moving organically into a new fast-growing geography, or a combination of these things.
As key business milestones are reached along this path, it makes sense for management to refinance, locking in funding for the next stage of the journey. Ultimately, we believe the cost of refinancing is a cost worth paying to achieve long-term goals.
The value of investments can fall. Investors may not get back the amount invested. Income from investments may vary and is not guaranteed.
1Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.
2948159 Exp: 3 July 2026
