High yield Bond and Beyond

Look out for…….

Introduction to High Yield Bonds (HYB). History of HYB The Basics Of the HYB market Types of HYB Key Statistics on HYB

Introduction on HYB

High Yield debt is defined as being below investment grade status, or carries a bond rating of below Ba1(Moody’s) and BB+ (S&P).

HYB always carries higher rate of interest because the company has the higher chance of default.

Will often contains numerous covenants. Usually issued in medium term notes (7yrs –10 yrs). Credit ratings plays a very vital role in HYB then any

other debt instruments.

Credit Rating and HYB

Credit Risk Moody’s S & P Fitch

Lower medium grade (Some what Speculative)

Ba BB BB

Lower Grade (Speculative) B B B

Poor Quality (May default) Caa CCC CCC

Most Speculative Ca CC CC

No Interest being paid or bankruptcy petition filed

C D C

In default C D D

History Of HYB Market:-

Before 1970s:- Relatively very small market. During 1970s:- Former investment grade companies issued

high yield bonds and were not widely held in investment portfolios as most dealers did not handled these securities. The companies which were unable to borrow from the banks went on to issue HYB.

Michael Milken from Drexel Burnham Lambert pioneered the market during 1970s.

In 1980s:- Used to finance speculative takeovers and mergers. From 1990 to 2009 :- HYB are being issued to provide working

capital needs, internal expansion, acquisition, refinancing etc.

The Basics Of the HYB market

Issuer Of HYB :- Rising Stars Fallen angels High Debt Companies LBO Capital intensive companies Foreign Govt and foreign corporations

Top 10 Industries Issuing HYB

Rank Industry Share of HYBM

1 Manufacturing 31.9 %

2 Radio and television 11%

3 Electric Service 7.7%

4 Personal and Biz Service 4.7%

5 Leisure 4.4%

6 Natural resource 4.3%

7 Telephone communications 3.7%

8 Transportation 3.5%

9 Retail 3.4%

10 Wholesale 3.0%

Who Invests in HYB?

Individual investor Mutual funds ( HY funds, income MF,

Corporate BF). Insurance companies Pension Funds CBO’s

Why has the market Grown

New types of bonds.( See in types) Rule 144A issuance. Increased quality of the HYB.( Next page) Medium term money from diversified investor base 10 year (non

call 5yr ),7 year (non call 4). No voting or economic dilution to ownership. Modest Covenants - (Eg: Limitation on indebtedness, Limitation

on “restricted Payments, Limitation on liens, Dividend restriction in Subsidiaries, Merger, consolidation and sale of assets, Transactions with affiliates, Sale and leaseback transactions, Consents, Reports.)

S & P Ratings Of HY Corporate Bond Issuance

B 58%

Non rated 4%

BBB 6%

BB 25%

CCC or lower 7%

B BB BBB CCC or lower Non rated

Types of HYB

Straight cash bonds/Plain vanilla Split coupon bonds/Step up notes Pay-in-kind bonds Floating rate and increasing rate notes (IRNs) Extendable reset notes Deferred interest bonds Zero coupon bonds Convertible bonds Multi tranche bonds

Benefits of HYB

Enhancement of current income Potential capital appreciation Security/priority of claims Portfolio risk diversification Less interest rate volatility risk than long term

U.S. treasury bonds. Exchange listing

Risks……..

Credit risk (Default risk, Downgrade risk) Market risk Interest rate risk Call Risk Liquidity risk Event risk Economic risk

Key Statistics :-

High Yield bonds Defaults rate has a direct relation with the spread:

Year Spread Default %

1994 380 3.8

1997 350 1.7

2000 600 6

2003 1000 9.5

2006 375 2

2009 800* 6*

Historical Yield

Lehman U.S.HY index current yield has been compared with ‘B’ and ‘BB’ rated current yield for different years.

Year LUSHYI %

LUSHYI-B %

LUSHYI-BB %

1992 12 11 10

1996 9.30 9.25 9

2000 10 9.5 9.25

2004 8.75 9 7

2008 9.30 9.35 7.9

High Yield Deal Volume

Period Current Year(20009) Previous year(2008)

YTD $130.349 billion

311 deals

$71.349 billion

131 deals

QTD $26.274 billion

71 deals

$2.148 billion

3 deals

MTD $ 6.221 billion

20 Deals

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WTD $2.528 billion

7 deals

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Open to Discussion…

Thank you all…..

Bibliography

High Yield Prospect news 11.11.2009 issue Investing in high yield bonds by WACHOVIA SECURITIES. The bond market association publication. R.I.T.F.M.A Financial management association Investinginbonds.com Moody’s annual report Thomson financial report.