Of all the misconceptions regarding the CCC-rated segment of the high yield market, DDJ believes one of the most common is that all CCC-rated bonds have essentially the same level of risk.
One of the core tenants of DDJ’s investment philosophy is that the CCC-rated segment is one of the most inefficient of the high yield market. Why is this segment inefficient? We believe that it is due in part to the misconception listed above. As a result of the perceived riskiness of the CCC-rated segment, investment guidelines for many high yield portfolios commonly restrict or prohibit CCC-rated holdings, resulting in the CCC-rated segment of the high yield market being less researched relative to higher quality segments. In simple terms, fewer investors targeting this area of the market results in less efficient pricing and a slower incorporation of new data/events into market prices.