24 Apr 2023 3 min read

A new dawn for high yield investors? Leveraged life in a post-COVID world

By Martin Reeves

COVID and the part-closure of the US high yield market since 2022 has worried investors. Yet a recent meeting with company management highlights grounds for optimism and a new outlook on sustainability.


Nowadays, I only meet with companies occasionally, and only when I sense a real opportunity to gain valuable insights as an investor. Last week was an excellent case in point, when I met with a CEO I’ve known for over 20 years. 

This CEO is also the main shareholder for a company that used leverage to grow from a small Irish bottler to one of the largest packaging companies in the world. Along the way the company acquired one of the main bottling plants for Peroni, a beer that is now ubiquitous at any corporate event, so that part of the business has clearly gone well.

The story the CEO told, the future he foresaw and the vision he had for the company were quite different from what I’d become accustomed to hearing over the last couple of decades. 

And what’s more, this new corporate vision is now widespread among high yield issuers, which is something that gives me a lot of comfort as a high yield investor. 

A new approach to capex spending

Shocked by COVID-19 and by the part-closure to new issuance in the US high yield market in 2022, there was determination to build up cash from operating the business to reduce leverage and refinancing risk. All capital expenditure was to come from internal funds, while the payback had to be within around three years. 

Given the efficiency gains from new plant investment, that could potentially represent a very high return on investment on its capital expenditure.

I think many companies have adopted this approach as it reduces financial risk considerably in the high yield market and means that the market could potentially cope with staying closed for almost another couple of years. Not being forced to come back to market this year or next could also mean that high yield companies can weather the inflation and rates storm very well, with the opportunity to return to new issuance once markets and margins are more ‘normal’.

Building resilience through ESG

The second key aspect of note was the discussion of what many know as environmental, social and governance issues, albeit without specific reference to the initials ‘ESG’.

The CEO talked about supporting STEM (science, technology, engineering and mathematics) programmes across the globe where the business operates, as well as giving apprenticeships in less developed parts of the world. There were also numerous examples of renewable energy being hooked up to new plants wherever possible.

Integrating with society and focusing on sustainability were not ambitions often announced by high yield companies when the acquisition trail began all those years ago. In my view, having a demonstrable ESG plan could also help lower the cost of finance and lay the foundations for a resilient corporate profile.

Lessons from the pandemic

The final insight I took away from my meeting with the CEO was the realisation from his customers of how important quality and robust access are to the supply chain. 

The pandemic in particular highlighted that having access to a quality bottle to drink from was key to the brand in customers’ eyes. In response, the company instigated a new focus on reliability and quality, including better relationships with suppliers.

I came away with a clear impression that far from the closure of the US high yield market representing a concern, this could actually herald a new dawn for high yield investors: I believe we should be encouraged by an asset class with an increasing management focus on lower debt, less refinancing risk and real-world sustainability.


Martin Reeves

Global Head of High Yield

Martin runs a team of high-yield professionals focused on global opportunities. He joined LGIM in September 2011 from AllianceBernstein, where he worked for 13 years. Martin was a founding director of the European High Yield Association and was Co-Vice Chair of the Association for Financial Markets in Europe’s High Yield Board. He qualified as a chartered accountant with Ernst & Young and gained a MA from St Catharine’s College at the University of Cambridge, where he read Economics.

Martin Reeves