Which statement is true about high-yield debt compared to bank debt?

Which statement is true about high-yield debt compared to bank debt?

• A. High-yield debt has higher interest rates than bank debt.
• B. Bank debt interest rates are usually fixed, whereas high-yield debt rates are floating.
• C. High-yield debt has incurrence covenants while bank debt has maintenance covenants.
• D. Bank debt is usually amortized, while high-yield debt has a bullet maturity.

Answer: (C)

The key idea is how covenants are structured in different kinds of debt. High-yield debt almost always uses incurrence covenants, which only bite when the issuer undertakes a specific action—like taking on new debt, making a large acquisition, or selling assets—subject to meeting the stated conditions. Bank debt, by contrast, typically carries maintenance covenants that require the borrower to stay in compliance with certain financial metrics at all times (for example, leverage or interest coverage levels). This difference mirrors risk management: high-yield lenders prefer protection that activates around major actions, while bank facilities emphasize ongoing financial discipline. So, that contrast—incurrence covenants for high-yield and maintenance covenants for bank debt—is the true distinction.

The key idea is how covenants are structured in different kinds of debt. High-yield debt almost always uses incurrence covenants, which only bite when the issuer undertakes a specific action—like taking on new debt, making a large acquisition, or selling assets—subject to meeting the stated conditions. Bank debt, by contrast, typically carries maintenance covenants that require the borrower to stay in compliance with certain financial metrics at all times (for example, leverage or interest coverage levels). This difference mirrors risk management: high-yield lenders prefer protection that activates around major actions, while bank facilities emphasize ongoing financial discipline. So, that contrast—incurrence covenants for high-yield and maintenance covenants for bank debt—is the true distinction.