commodity linked bonds

[r_v.s]

In the notes, it says commodity linked bonds would appear less risky to lenders. How so? When commodity prices and hence company profits fall, the payments on these bonds would too ( and rise when commodity payments rise). Isn't there greater uncertainty? How does that make them less risky?? Is it because companies are less likely to default when the prices and profits are low if they need to pay less on these bonds?

 

[Colin McKee]

Good point. Maybe someone else has a view on this. The core reading suggests that these increase a company's debt capacity, which in turn suggests that they are seen as less risky by lenders. It may be just that the coupon and repayment amounts go down when the company's profits go down, which means they are less risky "to the company". But maybe not less risky "to the investor" who suffers uncertainty in amount. So the key is that the para is referring to credit risk only and ignoring the volatility risk.