Demand for zero-coupon bonds coupled with equity tranches is gaining ground as high-yield investors latch onto the leveraged structures to beef up risk/return profiles. “Rather than take on a sub-investment grade bond, they are buying equity that is leveraged to investment grade and getting better return from their exposure,” said one structuring official, noting specialist investment funds in the U.S. are making up the bulk of buyers. “The format is simple and balance between risk and reward is apparent,” noted Michael Hampden-Turner, credit strategist at The Royal Bank of Scotland in London, in a recent report. In the structure, investors pay a small amount upfront and receive par at maturity, minus any credit events experienced through its life. Tenors are generally seven or 10 years.
