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Duration Remains Unattractive, Says Veteran High Yield Bond Investor
Forward Guidance
The Challenges of Bond Investing in Leveraged Buyouts
Bond investors face significant challenges when investing in leveraged buyouts as financial sponsors often prioritize their own interests over those of bondholders and lenders. These sponsors can manipulate LBO transactions to benefit their equity at the expense of bondholders, leading to misalignments in incentives. Companies owned by financial sponsors tend to prioritize quick dividends to themselves and their limited partners, which can negatively impact bondholders. High leverage, unmet synergies, and rising interest expenses further exacerbate the risks for bondholders in such scenarios. Additionally, many high yield benchmark strategies are forced to invest in these leveraged buyouts, causing potential problems in the junk market. Bondholders may find themselves in a vulnerable position with limited options if these highly leveraged companies face financial distress, as sponsors have flexibility to act in their own interest. To mitigate these risks, bond investors prefer to steer clear of investing in companies owned by financial sponsors involved in leveraged buyouts.
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