Corporate bonds are debt instruments issued by companies, sold to public investors, and traded in the secondary market. Globally the corporate bond market is about USD 50 trillion outstanding, less than half the size of the government market but every bit as important for company funding, pension fund yield, and the transmission of monetary policy to the real economy.
Investment grade versus high yield
The single most-important division in corporate credit is between investment-grade (IG) and high-yield (HY, also called 'junk' or 'sub-investment-grade') bonds. The cut-off is conventionally BBB-/Baa3: BBB- and above is IG; BB+/Ba1 and below is HY. The distinction is not arbitrary — many institutional mandates (pension funds, insurance companies) restrict holdings to IG, so the boundary creates a sharp jump in liquidity, spread, and the investor universe. A downgrade from IG to HY is known as a 'fallen angel' event and typically triggers forced selling.
Spread over benchmark
A corporate bond's yield equals the matched-maturity Treasury yield plus a credit spread that compensates the buyer for the issuer's default risk, illiquidity, and risk premium. IG corporate spreads have historically ranged from 80 to 250 basis points over Treasuries; HY spreads from 300 to 1,500 basis points; distressed paper trades well above that. Spreads widen sharply in stress (HY spreads exceeded 2,000 bps in the depths of the 2008 crisis and again briefly in March 2020) and compress in risk-on episodes.
Corporate yield = Treasury yield + credit spreadCredit spread ≈ expected loss + risk premium + liquidity premium
Seniority and security
- Senior secured bonds: backed by specific collateral and paid first in default. Recovery rates historically 60-80%.
- Senior unsecured bonds: the default category for IG corporates. Recovery rates 35-50%.
- Subordinated bonds: junior to senior debt but senior to equity. Recovery rates 15-30%.
- Hybrid securities: contingent convertibles, perpetual subordinated. Recovery rates often near zero.
Covenants — the contractual protection
Bond covenants are commitments in the indenture (the contract between issuer and bondholders) that restrict the issuer's behaviour during the life of the bond. Maintenance covenants require ongoing compliance with specified financial ratios; incurrence covenants restrict specific actions (additional debt issuance, asset sales, dividend payments). High-yield bonds typically carry stronger covenant packages than IG because the credit risk is higher; loans tend to have stronger covenants still. The post-2014 trend toward 'covenant-lite' loans has been a recurring concern for credit analysts.
Reading a bond prospectus
Every analyst will eventually read a 200-page bond prospectus. The map: use of proceeds (page 1-3), the description of the notes (40-80 pages — yield, maturity, redemption features, covenants), the issuer business description (50-100 pages), the risk factors (10-20 pages — read these), the financial statements (50+ pages), and the indenture appendix. The notes description and risk factors are the highest yield reading for time.
African corporate bonds
Domestic corporate bond markets across Africa are thin. Kenya's NSE-listed corporate bond market has perhaps KES 100-150 billion outstanding across all issuers, dominated by banks and a handful of large corporates. South Africa's local market is meaningfully deeper. For larger African corporates needing scale, the eurobond market — USD-denominated bonds sold to international investors — has been the principal channel. MTN, Dangote Cement, Liquid Telecom, Safaricom (planned) have all tapped or considered international debt markets.
The default tracker
Moody's publishes a monthly default report and an annual default study. The annual report includes the migration matrix (probability of moving between rating categories) and recovery rate statistics. These are the empirical foundation for every credit risk model. The data go back to 1920 in Moody's case.
Exercise
A 5-year, BB-rated corporate bond trades at a yield of 9.50%. The matched-maturity Treasury yield is 4.20%. What is the credit spread, and approximately what does it compensate for?