High Yield Bonds: Job Creation, Democratization of Capital and Investment Opportunities

Presented by:Patrick Mitchell

Managing DirectorPost Advisory Group, LLC

History of High Yield

The American Dream is about equality and freedom

Our free market system is the envy of the world

Enables entrepreneurs to create new industries and build new companies

Access to capital makes an entrepreneur’s dreams become reality

Early High Yield Issuers

Alexander HamiltonSecretary of the Treasury

J.P. MorganFounder of J.P. Morgan and

creator of U.S. Steel

Jobs SavedJobs EnhancedJobs Created

The American Dream

Hovnanian Enterprises, Inc.In 1959, An Iraqi family fled to the US and pooled their resources to launch a construction company

Their Concept: To build middle-income condos & townhouses using mass production technology

Strapped for growth capital in the early 1980s, the company was able to tap into the high yield market

After more than 40 years in business, Hovnanian has stayed close to its original concept:

• Builds about 11,500 homes a year, with prices ranging from under $100,000 to about $1 million

• Employs more than 3,000 people• Sales over $3 billion• Family still owns more than 90% of the business

Rebuilding

A company may decline for many reasons:New technology makes existing products obsoletePoor management decisionsGlobal competitionChanges in cost of raw materialsOverleveraged / wrong capital structure

When companies fall onto hard times, it is not that they are “worthless” they are only “worth less”…temporarily.

Rebuilding is a challenge for those that see value where others see ruin.

It takes determination, creativity and courage to rebuild an enterprise under difficult circumstances rather than walk away…

RebuildingChrysler

Throughout the 1970s, the Chrysler Corporation was faltering

Troubles came from U.S. and Japanese competitors, high gas prices (1973 oil shock), and poor management decisions

Late 1970s, the U.S. Government deciding that Chrysler was too important to fail, initiated a multi-billion rescue plan

The company was able to raise capital by selling off assets, generating cash flow. Most notably, cash came through the only market still open to finance the company – the high yield market

A new management team was brought in under the leadership of Lee Iacocca and the rest is history…

Unlike countries like Japan – that are dependent upon the Government for bail out – high yield bonds have enhanced our free market enabling companies to succeed

Pioneers

Birth of the Cellular IndustryWireless is one of the most promising technologies for the 21st Century

1946, mobile telephony service was tested in St. Louis

1970, AT&T had an improved service• By 1983, AT&T had done a study that concluded cellular as

a business unit to be virtually worthless

1982, the FCC offered licenses in 30 cities to build out the service

Dozens of companies filed for licenses…one made history…

Pioneers

McCaw Cellular Communications 1969, after his father’s death, Craig McCaw took over the family-controlled cable company

1979, McCaw focused on the cellular communications

1982, McCaw won licenses in 30 U.S. markets from the FCC

In mid 1980s, McCaw raised a series of capital from the high yield marketplace

By the early 1990s, McCaw had become one of the industry’s largest companies

Ironically, by the late 1990s, in order to complete in cellular, AT&T purchased McCaw for more than $12 billion

Pioneers

The Building of Cable TelevisionBroadcasting has existed since Radio emerged during the 1920s followed by television in the 1930s

Early 1970s, pay television makes its debut

In 1972, Time, Inc. launched HBO

While cable was popular, its momentum slowed in the 1980s primarily due to economics

• Marginal costs were low / profits were high, but initial installation was very expensive

The industry had an insatiable appetite for capital

At the same time, high yield bonds were coming of age.

It was the marriage of these two – high yield securities and the cable industry – that helped change the broadcasting industry forever.

Pioneers

Turner Broadcasting1963, Ted Turner takes over his father’s advertising business

1970, Turner Broadcasting is launched with a bankrupt Atlanta UHF TV station

• This fledging station would ultimately challenge the networks and cable TV (today it is the Superstation TBS)

1980, CNN is launched as the first 24-hour television news network• The pundits coined it the “Chicken Noodle Network”• Today, it is the world’s source for breaking news

During the 1980s, Turner financed the growth of his business with high yield financing

In 1996, Time-Warner merged with Turner Broadcasting• At the time, it employed more than 3,000 people • Valued at more billions of dollars• Owned and operated: CNN, TBS, TNT, Cartoon Network, Turner Movie Classics,

MGM film library

High Yield Use of Proceeds

Acquisitions

Debt RefinancingOther

General Corporate Uses

41%

33%17%9%

1983-1989

High Yield Use of Proceeds

Acquisitions

Debt RefinancingOtherGeneral Corporate Uses

21%

48%16%15%

1990-1999

High Yield Use of Proceeds

40.1%

General Corporate Uses

OtherDebt Refinancing

Acquisitions

50.4%

9.5%40.1%

<1%

2003

Democratization of Capital

Democratization of Capital

Definition: Expanding capital ownership, thereby

aligning the interests of investors, workers, and the broader public.

How does it apply to High Yield? Between 1973 and 1988, Senator Russell

Long sponsors a series of legislative measures to enable employees to “own” their jobs through capital rather than “rent” their jobs through wages.

Jobs…Jobs…Jobs

Few Companies are Investment Grade

California LouisianaNumber Share Number Share

Investment Grade Companies

64 <.1% 4 <.1%

Non-Investment Grade & out of State Companies

2,909,847 99.9% 334,890 99.9%

Total 2,909,911 100% 334,894 100%

Few People Work for Investment Grade Companies

California LouisianaNumber Share Number Share

Investment Grade Companies

1,561,760 11.8% 28,040 1.8%

Non-Investment Grade & out of State Companies

11,677,856

88.2% 1,571,442 98.2%

Total 13,239,616

100% 1,599,482 100%

Investing in High Yield

High Yield Bonds: Not Just “Junk”

What do you call 99% of all companies in America?

What do you call a loan to a company that created almost all of the new jobs?

What do you call one of the top performing investments?

Evolution of High Yield1978 2004

Market Size $26 Bn $906 Bn

New Issue Volume $2 Bn $150 Bn

Bonds versus Bank LoansStructured Products

Only bondsNone

$900 Bn bank loan market$100 Bn

Active Dealers 3-4 25-30

Index (# of issues) 30 1,400

Information Limited Bloomberg

Transparency None FIPS

CreditwatchLiquidity Rating

NoNo

YesYes

Trading Insurance Companies: “No Losses”

“Everything is For Sale”

Sinking Funds Many “What is a Sinking Fund”

Investors Insurance CompaniesSavings & Loans

Mutual FundsMoney Managers

Hedge FundsFund of FundsMutual Funds

CDOsMoney Managers

Public/Private Pension Funds

Size of the High Yield Market

Size of the High Yield MarketSource: JP Morgan

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$ (b

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ns)

High Yield New Issuance

$0

$20

$40

$60

$80

$100

$120

$140

$160

1999 2000 2001 2002 2003 2004In Billions

The Power of Compound Interest

Rate of Return Value of Investment20% $ 19,781

14% $ 4,469

12% $ 2,674

10% $ 1,586

8% $ 932

6% $ 541

$100 invested over 30 years

Capital Structure Matters

Senior Debt

Senior Secured Debt

Subordinated Debt

Preferred Stock

Common Stock

Risk is Not Just a Four Letter WordQuestion: What do the following great companies have in Common?

AT&T General MotorsBellSouth IBMFord Motors Microsoft General Electric Walt Disney Corp.

Answer: The stock price for each of these excellent and well-respected companies is now lower than the stock price on December 31, 1998. In fact if you held an equal weighted portfolio of these great companies your total rate of return over the past five years would have been a loss of over 10%.

You Already Own High Yield

If you own the S&P 500 stocks, you already own over 100 high yield companies including the following:

American Airlines JC Penney

Boise Cascade Louisiana Pacific

Briggs & Stratton Lucent Technologies

Foot Locker Toys-R-Us

Goodyear Tire & Rubber Winn-Dixie

Hilton Hotels Xerox Corp.

Many Institutions purchase S&P 500 Stocks because they are some of the best companies in the world. We agree!. The major difference is that in case of financial difficulties high yield bond holders will get paid 100% of their investment before the equity holder will get a dime.

Risk and Return 1979-2003

9.75%

10.00%

10.25%

10.50%

10.75%

6.00% 8.00% 10.00% 12.00% 14.00% 16.00%

Risk

Return

High Yield

Equities

Treasuries

People Make the Difference

Manager can Make the Difference!

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Retu

rn

Risk/Return Risk/ReturnMarch 31, 1994 to March 31, 2004March 31, 1994 to March 31, 2004

Risk (Standard Deviation)

Median Line

Media

n L

ine

* Monthly Data

Post Advisory Group

Investment Opportunities

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Government

High Yield

S&P

An Interdependent Marketplace

In a healthy society, free enterprise is the source of growth, prosperity and progress

Companies, regardless of industry – food service, technology, healthcare, consumer products, telecommunications – collectively represent our economy, and create value from which we all benefit

In perspective, it our free enterprise system and access to capital, not politics, which weaves the stronger fabric of American life