The convergence of high yield and investment grade credit | Insight Investment

The equity vs debt dilemma

In a recent conference call with an AA-rated corporate domiciled in the eurozone, the company spoke about how compelling it was to do share buybacks at the current time due to the mismatch between debt interest and dividend rates. The company had recently come to the market with an issue that had a coupon of around 3.5% but was paying 6% as a dividend on its equity. Issuing debt to buy back shares represented a cashflow saving. Another investment grade company stated that they were happy to ‘lean into their balance sheet’ to buy back shares.

This decision – whether to take on more debt to fund share buybacks – is facing the management of investment grade corporates around the world. If the trend continues, it is likely to result in more investment grade corporates moving down the rating curve over time.

The great ratings convergence

There has already been a marked shift in the composition of the US investment grade credit market over the past two decades (see Figure 1). In 1999, BBB-rated companies accounted for 31% of the market; by September 2025, this figure had risen to 45%. In contrast, AAA-rated bonds fell sharply from 6.5% to just 1%, while AA-rated bonds declined from 17% to 8%. This trend reflects a clear deterioration in overall credit quality, with lower-rated issuers now dominating the investment grade universe.

Figure 1: US investment grade credit has gravitated to BBB¹

A key driver of this trend is the rise of share buybacks and the increasing pressure on corporates from shareholders. As companies mature and organic growth becomes harder to achieve, buybacks emerge as a strategic lever to boost earnings per share.

However, this often comes at the cost of higher leverage, which erodes credit quality. Many large firms have come to view a BBB rating as optimal, balancing funding costs with shareholder returns. Notably, this migration towards BBB ratings is not confined to the US; a similar pattern is unfolding in European credit.

In high yield markets, we see an opposite trend (see Figure 2). Between 1999 and September 2025, the percentage of the US high yield market holding a BB rating rose from 35% to 54% – a marked improvement in average credit quality. 

Figure 2: US high yield has gravitated towards BB¹

High yield companies are typically at a very different stage of maturity than their investment grade counterparts, being smaller in scale and often experiencing rapid growth. Debt is not used for share buybacks but rather as a tool to accelerate growth, and to enhance profitability and cashflows. This strategy frequently serves as a stepping stone towards either a public listing or a future sale.²

Over time, governance standards have improved, with management teams proactively managing debt levels and maturity profiles to minimise the risk to their growth strategy. This has contributed to stronger credit ratings and a decline in default rates across the high yield market. As at September 2025, the 12-month default rate for US high yield was just 1.2%, well below its long-term average of 3.9%¹.

In our view, the credit quality in the high yield market should continue to improve, with defaults remaining at low levels through 2026. We believe this makes the current level of yields compelling.