What are some of the best ideas today? One answer is leveraged companies.
A leveraged company employs a significant amount of debt in its capital structure through any combination of:
- Borrowing from banks and other lenders
- Issuing fixed-income convertible or preferred equity securities
Many of these companies lack the operating history or balance-sheet strength to merit an investment-grade bond rating from the major rating agencies.
Consider these risks before investing: Investments in small and/or midsize companies increase the risk of greater price fluctuations. Growth stocks may be more susceptible to earnings disappointments, and value stocks may fail to rebound. Our focus on leveraged companies and the funds' "non-diversified" status can increase the funds' vulnerability to these factors. The use of short selling may increase these risks. Stock prices may fall or fail to rise over time for several reasons, including general financial market conditions and factors related to a specific issuer company or industry. You can lose money by investing in the funds. For Capital Spectrum, these risks also apply: Lower-rated bonds may offer higher yields in return for more risk. Growth stocks may be more susceptible to earnings disappointments, and value stocks may fail to rebound. Bond investments are subject to interest-rate risk (the risk of bond prices falling if interest rates rise) and credit risk (the risk of an issuer defaulting on interest or principal payments). Interest-rate risk is greater for longer-term bonds, and credit risk is greater for below-investment-grade bonds. Unlike bonds, funds that invest in bonds have fees and expenses. Our use of short selling may increase these risks. Mortgage-backed securities are subject to prepayment risk and the risk that they may increase in value less when interest rates decline and decline in value more when interest rates rise. Stock and bond prices may fall or fail to rise over time for several reasons, including general financial market conditions and factors related to a specific issuer or industry.
Understanding corporate capital structure
The capital structure is a hierarchy of claims on a company. Each level has different features and a different level of protection — with bank loans offering the highest protection, and rights and warrants the lowest protection.
In most leveraged companies, bank loans tend to compose the largest slice of the corporate capital structure, in terms of value, followed by bonds, convertibles, equity, and rights and warrants.