www.ebook3000.com High Yield Debt www.ebook3000.com High Yield Debt An Insider’s Guide to the Marketplace RAJAY BAGARIA www.ebook3000.com This edition first published 2016 © 2016 Rajay Bagaria Registered office John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher Wiley publishes in a variety of print and electronic formats and by print-on-demand Some material included with standard print versions of this book may not be included in e-books or in print-on-demand If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com For more information about Wiley products, visit www.wiley.com Designations used by companies to distinguish their products are often claimed as trademarks All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners The publisher is not associated with any product or vendor mentioned in this book Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose It is sold on the understanding that the publisher is not engaged in rendering professional services and neither the publisher nor the author shall be liable for damages arising herefrom If professional advice or other expert assistance is required, the services of a competent professional should be sought Library of Congress Cataloging-in-Publication Data Names: Bagaria, Rajay, 1977– author Title: High yield debt : an insider’s guide to the marketplace / Rajay Bagaria Description: Hoboken : Wiley, 2016 | Includes index Identifiers: 9781119134411 (hardback) Subjects: LCSH: Junk bonds | Capital market | Business cycles | BISAC: BUSINESS & ECONOMICS / Banks & Banking Classification: LCC HG4651 B294 2016 (print) LC record available at http://lccn.loc.gov/2015042482 A catalogue record for this book is available from the British Library ISBN 978-1-119-13441-1 (hbk) ISBN 978-1-119-13443-5 (ebk) ISBN 978-1-119-13442-8 (ebk) ISBN 978-1-119-23695-5 (ebk) Cover Design: Wiley Cover Images: Egg Image: © Excentro/Shutterstock Unicycler Image: © ra2studio/Shutterstock Set in 11/13pt Times by Aptara Inc., New Delhi, India Printed in Great Britain by TJ International Ltd, Padstow, Cornwall, UK Dedication to come www.ebook3000.com Contents Preface xi Acknowledgments xvii About the Author xix Foreword xxi CHAPTER Development of the High Yield Industry 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 What is High Yield Debt? The Importance of Credit Ratings The Origins of High Yield Advent of the Leveraged Buyout Junk Bonds Market Maturation and Growth High Yield Today Summary CHAPTER High Yield Issuers 2.1 2.2 2.3 2.4 2.5 1 11 13 14 17 High Yield Issuers Capital Structure Considerations Choosing Between High Yield Bonds and Leveraged Loans High Yield Issuers by Industry Purpose of High Yield Debt 17 21 22 25 25 vii www.ebook3000.com viii CONTENTS 2.6 2.7 2.8 The Role of Investment Banks The High Yield Capital Raising Process Summary CHAPTER Buying High Yield Debt 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 Who Can Buy High Yield Bonds? Who Can Buy Leveraged Loans? Buyers of High Yield Debt Investment Mandates Impact Volatility Collateralized Loan Obligations (CLOs) Implications of an OTC Market Tracking High Yield Liquidity Total Return Swaps and Margin Finance Summary CHAPTER High Yield Financial Concepts 4.1 4.2 4.3 4.4 4.5 4.6 4.7 Key Economic Terms of High Yield Debt High Yield Call Protection Fixed Versus Floating Rate Debt Bond Yields, the Risk-Free Rate, and Credit Spreads More Advanced Yield and Spread Concepts Common Issuer Metrics Tracked Summary CHAPTER Debt Structures 5.1 5.2 5.3 5.4 5.5 5.6 5.7 Ranking and Subordination Operating and Holding Companies Leveraged Loan Structures High Yield Bond Structures Payment-in-Kind Debt AHYDO Summary 28 30 32 33 33 35 35 37 38 42 44 45 48 49 49 50 52 54 56 58 61 63 63 66 68 72 75 75 76 163 Glossary Prepayments Refers to debt repayments prior to the maturity of the instrument Price The value of a debt instrument stated as a percentage of its notional amount A high yield bond or leveraged loan can trade above or below a price of 100 Note, the percentage sign is omitted when stating high yield prices Primary market The market where issuers obtain funds through the sale of new securities, loans, and other instruments Also referred to as the new issue market, the primary market stands in contrast to the secondary market where existing securities and assets are traded between investors Prime brokerage A service provided by investment banks to primarily hedge funds Prime brokerage involves providing financing for investments and securities borrowing for short selling among other things Many prime brokerage businesses also include a service called capital introductions or “cap intro.” The capital introductions team helps hedge funds meet prospective investors Priming See Layering Private equity firm An investment firm that pools capital from institutions, pension funds, endowments, high net worth individuals, and other investors to make equity investments that provide control or influence over companies Often called financial sponsors, these firms’ equity investments are not in publicly listed stock and therefore are called private equity Private equity firms pursue leveraged buyouts, venture capital, and growth capital investments Private placements Privately negotiated transactions with more sophisticated investors Private placements differ from public offerings in that interest in the transaction is not solicited more broadly In a private placement, the issuer works with one or a few parties to raise capital which then rarely trades in the secondary market Project financings A type of high yield transaction in which an issuer raises debt in order to back a business expansion, for example, a new casino construction, factory equipment, or utility infrastructure The debt raised in project financings primarily relies on the project’s assets and projected cash flows for debt service Sometimes parent guarantees are provided which can reduce the risk associated with new ventures and therefore lower the cost of the debt capital being raised Prospectus A type of offering memorandum for high yield bonds, which is required by and filed with the Securities and Exchange Commission See Offering memorandum Qualified Institutional Buyer (QIB) A purchaser of securities that is deemed to be financially sophisticated and can participate in less regulated markets and financial instruments Rule 144A requires an institution to have $100 million of securities among other requirements Ranking A legal term that denotes a debt’s status or where a claim stands in relations to others Rank distinctions are made on (1) whether or not the debt is secured and (2) its level of seniority www.ebook3000.com 164 GLOSSARY Ratings arbitrage Refers to a difference in the returns of two debt instruments with the same rating For example, a AAA rated commercial mortgage back security could have a credit spread of 125 bps, compared to a AAA CLO liability spread of 150 bps The 25 bps of excess spread provided by the AAA CLO liability is considered the ratings arbitrage Ratio debt Describes a debt basket that is not limited by a dollar amount but rather is subject to a certain financial ratio, most commonly an interest coverage ratio in bond indentures or a leverage ratio in credit agreements Recovery rates or recoveries Terms that represent the principal value of a debt claim remaining post default, expressed as a percentage of face value Refinancing A high yield transaction where existing debt is repaid with new borrowings This is typically done to lower the company’s cost of borrowings or to extend a maturity Relative value An assessment of the risk, liquidity or return of one security, loan or asset class versus another Relative value investors can invest broadly to find the best perceived risk-return Remedies block Following an event of default, a remedies block prevents junior debtholders from accelerating their debt for a certain period of time ranging from 90 days to 180 days, unless the senior debt has been accelerated first This is also known as a standstill Restricted payments Refers to payments that essentially represent collateral leakage and are therefore restricted This can include distributions to the equity holders and prepayments of junior debt Restricted subsidiary A subsidiary that is subject to covenants Not every restricted subsidiary is a guarantor of the debt The distinction is important in downside scenarios as other more junior claims may have a pari passu interest in non-guarantor restricted subsidiaries Reverse-flexed Refers to a decrease in the interest rate or other modifications that result in less beneficial terms to investors or more favorable terms to the issuer Reverse-flex occurs when the amount of investor interest in a debt offering significantly exceeds the amount being offered Revolving credit facility A capital line that provides the issuer with the flexibility to draw-down and repay capital based on its needs Risk-free rate The rate at which the government can borrow High yield issuers pay more than the risk-free rate for borrowings in order to compensate investors for the possibility of loss Risk-free rates therefore set a floor on corporate borrowing costs Risk premium See Credit spread Rollover When an investor decides to maintain its investment in an issuer that is refinancing its debt, it is considered to be “rolling over” its interest Essentially it means that the investor will get repaid on its existing holdings and then will reinvest in the new financing 165 Glossary Rule 144A Exempts issuers from publicly filing financial statements with the Securities and Exchange Commission provided that the securities are sold to qualified institutional buyers (QIBS), which generally are large institutional investors that own at least $100 million in securities Under Rule 144A, QIBs can freely trade with each other, which has enhanced the liquidity of these unregistered offerings Many high yield bonds are sold pursuant to Rule 144A Sacred rights Actions that, by law, cannot be taken without unanimous consent The four sacred rights are: reducing interest rates, extending the maturity, releasing liens, and reducing the amount of loans Seasoned issuer A company that has outstanding high yield debt and therefore has an investor following Second lien loans Loans that maintain a security interest in the company’s collateral but that lien is subordinated to the lien held by the first lien term loan Secondary market The market for existing securities, assets, and other financial instruments In contrast to the primary market, the secondary market is where investors transact with each other rather than the originating entity Secured Refers to debt that has a lien on, or security interest in, assets that constitute collateral pledged in support of its claim Securities borrowing In order for a security to be sold short, the security must be borrowed Investment banks lend securities to short sellers and charge a fee for the service in addition to requiring collateral to be posted and maintained The security is delivered back to the investment bank when the short is covered and the security repurchased Senior secured notes Refers to bonds that have a lien on assets Senior secured notes typically have a first lien on certain collateral and a second lien on more liquid collateral (that might be secured by an asset based facility to provide the company with a working capital line) Senior secured Debt that benefits from liens on assets and payment seniority over other debt claims Senior subordinated notes High yield bonds typically issued at the operating company that are junior in right of payment to any first and second lien loans as well as to senior notes Seniority A descriptive term often included in the name of an instrument itself and relates to an ordering of payments for claims with similar collateral If a company has two bonds outstanding, one might be called “senior notes” while the other is called “junior notes.” Senior claims, as the terms suggests, get repaid prior to junior claims Sharpe ratio A standard performance metric calculated by taking the annualized total return of a risky asset in excess of the risk-free rate and then dividing this amount by the volatility or standard deviation of returns www.ebook3000.com 166 GLOSSARY Soft call Refers to call protection that only applies if the issuer seeks to refinance the loan with lower yielding debt A soft call is a form of yield protection Speculative grade A term used by rating agencies that refers to debt rated below BBB-/Baa3 Speculative grade, below investment grade, and high yield are all terms used interchangeably Standstill See Remedies block Structural subordination Refers to debt that is junior because it resides at a more remote holding company Subordination A legal term that describes the interrelationship, or relative priority, among various tranches of debt High yield has three types of subordination: (1) payment subordination, (2) lien subordination, and (3) structural subordination Technical default A non-monetary default such as a covenant breach Total return The actual return of an investment or asset class over a specified time period The total return of high yield is derived from interest income, fees, prepayment premiums, price appreciation/depreciation, and realized gains/losses Total Return Swap (TRS) A swap transaction where an investment grade bank uses its low-cost capital to buy higher yielding assets for a client such as leveraged loans The client posts collateral in an agreed-upon amount to protect the bank from losses The bank charges a fee on the notional amount of assets purchased and the client benefits from all residual income A TRS can provide financial leverage for assets that are not securities and therefore ineligible for margin finance TRACE (Trade Reporting and Compliance Engine) Developed by FINRA in 2002 to facilitate the mandatory reporting of OTC secondary market transactions in eligible fixed income securities All broker/dealers who are FINRA member firms have an obligation to report transactions in corporate bonds to TRACE under an SEC approved set of rules Tracking error A measure of how closely a portfolio follows the index to which it is benchmarked This is often assessed by returns or standard deviation differences Transferability Refers to the ability to transfer interests in a leveraged loan Leveraged loans are transferable, or more precisely “assignable,” usually with the consent of the issuer and the administrative agent of the loan facility Under-subscribed When a primary market offering receives less investor commitments than the amount of capital intended to be raised it is considered under-subscribed If an offering is under-subscribed, the lead investment bank, working in connection with the company’s owners, will usually increase the interest rate or provide other more favorable terms to investors in order to garner more interest in the transaction 167 Glossary Underwrite A term that refers to taking balance sheet risk When an investment bank underwrites a high yield offering, it takes the risk of that offering not selling to investors and remaining on its balance sheet Underwritten offering Refers to a transaction where an investment bank guarantees to provide capital to support a transaction such as a leveraged buyout or acquisition Investment banks must underwrite debt offerings, or commit to be a lender of last resort, in order for certain deals to proceed Underwritten commitments, also referred to as committed financings, are usually intended to be sold to investors Unitranche A type of loan popular with small to mid-sized companies In this type of financing, a lender provides one loan that encompasses both the senior and junior debt risk instead of parsing it up Unrestricted subsidiary A subsidiary that is not subject to the covenants and is free to operate without regard to the restrictions imposed by the high yield documentation Unsecured Refers to debt that does not have a lien on any assets Unsecured debt stands in contrast to secured debt Upgrade A positive change in a credit rating Rating agencies can upgrade or downgrade previously assigned credit ratings based on developments in the reference entity’s fundamentals or outlook Volatility A measure of risk that is based on total return deviations from a mean return WARF score The Weighted Average Rating Factor score WARF is a measure used to determine the credit quality of a portfolio Warrants A security that gives the holder the right to buy equity shares within a certain time frame at an exercise price Early mezzanine financings sometimes came with “penny warrants” to provide additional compensation for the risk Yield The rate of return on a debt instrument based on the price of the debt, interest rate, and other economic features Yield curve A line that plots the interest rates of comparable quality debt but with differing maturity dates The yield curve most commonly refers to the interest rates of the 3-month, 2-year, 5-year and 30-year U.S Treasury debt Yield-to-call The rate of return an investor would realize if a bond is called by the issuer at the first call date Yield-to-maturity The rate of return an investor would realize if a bond is repaid at maturity Yield-to-worst The lowest rate of return that can be received on a bond based on the issuer’s call schedule For investors, it is the worst possible yield scenario barring principal loss www.ebook3000.com Index 1940 Act see Investment Company Act ABLs see asset-based loans accelerate, 65 acquisitions, 25, 28 active investment strategies, 128 additional debt, 89 affirmative covenants, 81–83 agreements see credit agreements AHYDO see applicable high yield discount obligations alternative funds see private investment funds applicable high yield discount obligations (AHYDO ), 74, 75–76 arbitrage, 40 Articles, bond indentures, 79–81 ask price, 42–43 asset-based loans (ABLs), 69 asset classes see high yield asset class assets, CLOs, 41 Bank of America Merrill Lynch high yield index, 18–19 bank books, 31 bank loan funds, 130–131, 134–137 bankruptcy, 10, 91–92 Barclays U.S Corporate High Yield Index, 44 Basel Accord 1988, 36 baskets, 87 BDCs see business development companies benchmark huggers, 20 best efforts underwriting, 30 beta, 104–106 bid price, 42–43 BlackRock fund, 127, 129–130 bonds see also high yield asset class buyers of debt, 35–36 call protection, 51–52 closed-end funds, 136, 138, 139 credit spreads, 117–119 ETFs, 133–134 fixed/floating rate debt, 52–54 indentures, 77–95 junk, 9–11 leveraged loans, 22–24 mutual funds, 130 open-end funds, 138, 139 senior unsecured, 69 structures, 72–74 Treasury, 99, 100, 103, 105–107 yields, 54–58 borrowing bases, 69 Bruck, Connie, building baskets, 87 bullet maturity, 50 business development companies (BDCs), 138–141 business flexibility, 22, 23, 24 169 www.ebook3000.com 170 buying debt, 33–48 bonds, 35–36 buyers, 33–36 CLOs, 36, 37–42 leveraged loans, 35–36, 38–39 margin finance, 45–48 OTC markets, 42–43, 47 tracking liquidity, 44–45 TRS, 45–48 volatility, 37–38 buyouts see leveraged buyouts call protection, 50–52, 57–58 capital, equity, capital raising process, 30–32 capital structures, 21–24, 146 carry fees, 145 carve-outs, 87 cash flow, free, 50, 58–59 CDS see credit default swaps change of control, 90–91 CLOs see collateralized loan obligations closed-end funds, 127–128, 135–141 1940 Act, 127–128, 135–141 bank loan, 136–137 bonds, 136, 138–139 top five funds, 136 collateral leakage, 65 collateralized loan obligations (CLOs), 36, 37–42 arbitrage, 40 assets/liabilities, 40–42 credit ratings, 38, 40 sample structure, 41 supply and demand, 126 TRS, 46–47 committed financing, 30 Committee on Uniform Securities Identification (CUSIP) numbers, 89 compliance, TRACE, 44, 115 INDEX corporate raiders, correlation analysis, 104–106 cost of capital, 22 covenant-lite, 47, 85–86 covenants, 78, 81–86 credit agreements, 77–95 advanced provisions, 86–91 bankruptcy, 91–92 bond indentures, 77–95 covenant-lite, 85–86 covenants, 78, 81–86 documentation, 79–81 loan credit agreements, 77–95 sacred rights, 91–92 credit default swaps (CDS), 149–150 credit hedge funds, 20–21, 143, 148–150 credit ratings, 1–4 CLOs, 38, 40 excessive risk-taking, 123 high yield asset class, 103–104 importance of, 3–4 leveraged loans, 103–104 credit risk, 32–33 credit spreads, 54–58, 115–119 current return, 58 CUSIP numbers, 89 daily liquidity, 19, 38, 129 debt incurrence, 87–88 debt structures, 63–76 AHYDO, 74, 75–76 bond structures, 72–74 holding companies, 66–68, 74 leveraged loans, 68–71 operating companies, 66–68, 72, 74 payment-in-kind, 74, 75 ranking, 63–66, 70 subordination, 63–66 debtor-in-possession (DIP), 148 debut issuers, 31 171 Index defaults credit spreads, 116 events of, 81, 84 excessive risk-taking, 124 high yield asset class, 108–110 loss, 55–56 rates, 27–28 deferred sales loads, 129 demand, and supply, 124–126 development of industry, 1–15 appropriateness of industry, 14 credit ratings, 1–4 current situation, 13–15 junk bonds, 9–11 leveraged buyouts, 7–9, 12–13 market maturation, 11–13 origins of high yield, 5–7 what high yield debt is, 1–3 DIP see debtor-in-possession distressed debt, 143, 147–148 distressed investors, 92 dividends, 140–141 Dodd–Frank Act 2010, 93–94 Drexel Burnham Lambert investment bank, 6, 10 “dry powder”, 26 due diligence, EBITDA, 59–61, 71, 83–88, 94, 120–121 EBITDA cures, 85 EBITDAR, 60 economic growth, 1980s, effective yield, 58 energy industry, 124 enterprise value, 21 equity capital, contributions, LBOs, 13–14 issuers of high yield, 22 mezzanine debt, 147 private equity firms, 7, 26 ETFs see exchange-traded funds event-driven investing, 149 events of default, 81, 84 excess cash flow sweeps, 50 excess spread, 116, 117 exchange markets, 43 exchange-traded funds (ETFs), 18, 19 1940 Act, 127–128, 132–135 bank loan, 134–135 bonds, 133–134 credit hedge funds, 149 supply and demand, 125 face amount, 48 fair value, 116–119 fallen angels, 5–6 FCF see free cash flow federal fund rates, 106–107 Fidelity funds, 127, 129–131 financial concepts, 49–61 bond yields, 54–58 call protection, 50–52, 57–58 common metrics, 58–61 credit spreads, 54–56 fixed rate debt, 23, 52–54 floating rate debt, 23, 52–54 key economic terms, 49–50 risk-free rate, 54–56, 98, 115 spreads, 54–58, 115–119 yields, 54–58 financial covenants see maintenance covenants Financial Industry Regulatory Authority (FINRA), 44, 115 Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) 1989, 10 financial sponsors, 26 see also private equity firms FINRA see Financial Industry Regulatory Authority FIPS see Fixed Income Pricing System www.ebook3000.com 172 FIRREA see Financial Institutions Reform, Recovery and Enforcement Act The First Junk Bond (Platt), first lien loans, 65–66, 68–69 Fixed Income Pricing System (FIPS), 11 fixed rate debt, 23, 52–54 flexed pricing/terms, 32 floating rate debt, 23, 52–54 free cash flow (FCF), 50, 58–59 fungibility, 89 government research, 115 Great Recession, 10, 13, 27, 72, 93, 95, 118, 122 see also recessions “greenmail”, guaranteed debt, 67 Guidance/Guidance FAQ, 94–95 hard call protection, 51 hedge funds, 20–21, 38–39, 143, 148–150 high water marks, 144–145 high yield asset class, 97–111 annual price volatility, 101–102 annual variations, 100–101 beta, 104–106 comparative classes, 99–100 correlation analysis, 104–106 defaults, 108–110 historical performance, 99–101 interest rate risk, 106–108 performance, 97–111 price volatility, 101–103 recoveries, 108–110 returns by ratings, 103–104 Sharpe ratio, 97–99, 108 total returns, 97–100 volatility, 97–99, 101–103 historical credit spreads, 117, 118–119 INDEX holding companies (Holdco), 66–68, 74 holding company notes, 74 hurdles, 144 HYG see iShares iBoxx High Yield Corporate Bond illiquidity premium, 116 illiquidity risk, 18, 55 impairment, 92 incentive fees, 145 incurrence-based covenants, 83–84 indentures, bond, 77–95 index huggers, 20 indices, 18–19, 20, 44, 99, 115, 129 industry, 1–15, 25, 26, 115 information, market, 113–115 Interagency Guidance on Leveraged Lending (Guidance), 94–95 interest coverage ratio, 60 interest rate risk, 106–108 interest rates, 52–54, 106–108 Internal Revenue Code 1986, 128 investment banks, 6, 10, 28–29, 30–31, 113–114 Investment Company Act (1940 Act), 127–141 BDCs, 138–141 closed-end funds, 127–128, 135–141 ETFs, 127–128, 132–135 mutual funds, 127, 128–131 open-end funds, 128, 129–130, 137–139 private investment funds, 144 investment funds, 127–141, 143–145 investment grade debt, 1–3, investors, distressed, 92 iShares iBoxx High Yield Corporate Bond (HYG), 132–134 issuers of high yield, 17–32 annual default rates, 28 bonds, 20, 22–24 173 Index by industry, 25, 26 capital raising process, 30–32 capital structure, 21–24 categorization by size, 18 investment banks, 28–29, 30–31 leveraged loans, 18–20, 22–24 new issue loan volume, 28 purpose of high yield debt, 25–28 ten largest high yield bond issues, 20 ten largest leveraged loan issues, 20 tracking fundamentals, 119–122 JPM High Yield Index, 99, 129 junior debt, 64, 68, 70–72 junior notes, 64 junk bonds, 9–11 KKR see Kohlberg Kravis Roberts know your customer (KYC), 35 Kohlberg, Jr., Jerome, 7–8 Kohlberg Kravis Roberts (KKR), 8, 9, 19 Kravis, Henry, 7–8 KYC see know your customer layering, 88 LBOs see leveraged buyouts legal considerations, 77, 93–95 see also individual Acts; Investment Company Act leverage ratio, 59–60 leveraged buyouts (LBOs), 12 capital structure, 21 development of industry, 7–9, 12–13 equity contributions, 13–14 interest coverage ratio, 60 issuers of high yield, 27, 120–121 leveraged loans annual price volatility, 101–102 asset class performance, 99–101 beta/correlation, 105 buying debt, 35–36, 38–39 credit agreements, 77–95 credit spreads, 117–119 debt structures, 68–71 defaults/recoveries, 109–110 floating rate debt, 52–53 interest rate risk, 106–108 issuers of high yield, 18–20, 22–24 loan maturities, 50 LSTA, 45 price volatility, 101–103 returns by ratings, 103–104 S&P/LSTA Index, 18–19, 99, 115 supply and demand, 126 volatility, 37, 101–103 yield, 56–57 leveraged recapitalization, 25–26 liabilities, CLOs, 40–42 LIBOR, 52–54, 55, 108, 115 lien subordination, 64, 65–66 liquidity daily, 19, 38, 129 evaluating credit spreads, 117 high yield mutual funds, 130–131 issuers of high yield, 28 tracking, 44–45 loan credit agreements, 77–95 Loan Syndications and Trading Association (LSTA), 45, 115 loans see also collateralized loan obligations; credit agreements; leveraged loans asset-based, 69 bank loan funds, 130–131, 134–137 call protection, 51–52 first lien, 65–66, 68–69 maturities, 50 second lien, 65–66, 69–71, 148 London Interbank Offered Rate (LIBOR), 52–54, 55, 108, 115 long biased hedge funds, 149 www.ebook3000.com 174 long/short positions, 148–150 LSTA see Loan Syndications and Trading Association M&A see mergers and acquisitions McCaw Cellular, maintenance covenants, 83–86 make-whole premiums, 51 management roadshows, 31 mandatory amortization payments, 50 margin finance, 45–48 margins of safety, 12, 14 marked-to-market, 114 market for BDCs, 140 market flex, 36 market information, 113–115 market maturation, 11–13 market opportunities, 113–126 assessment, 113–126 credit spreads, 115–119 excessive risk-taking, 122–124 market information, 113–115 maturity wall, 122–123 supply and demand, 124–126 tracking issuer fundamentals, 119–122 maturities, loan, 50 maturity wall, 122–123 mergers and acquisitions (M&A), 25, 28 Merrill Lynch index, 18–19 mezzanine debt, 143, 145–147 MFN see most-favoured nations clause Milken, Michael, 6, 10 Moody’s ratings agency, 1–3 most-favoured nations (MFN) clause, 89–90 mutual funds, 18–19, 20 1940 Act, 127, 128–131 bank loan, 130–131 bonds, 130 INDEX CLOs, 38–39 open-end, 129–130 supply and demand, 125 top five, 130 NASDAQ stock market, 42–43, 129, 140 negative correlation, 105 negative covenants, 81–84, 87–88 net asset value (NAV) 1940 Act, 128, 129 closed-end funds, 135–139 ETFs, 132 open-end funds, 137–139 net leverage ratio, 60 new issue forward calendar, 124–125 New York Stock Exchange (NYSE), 42, 129, 140 no-call provisions, 24 notes, 64, 72–74 notional amount/value, 47, 49 NYSE see New York Stock Exchange odd lots, 35 offer price, 42 offering memorandums, 31 offerings with registration rights, 34 OID see original issue discount Opco see operating companies open-end funds, 128, 129–130, 137–139 operating companies (Opco), 66–68, 72, 74 Oppenheimer mutual fund, 131 opportunities see market opportunities original issue discount (OID), 49–50 origins of high yield, 5–7 OTC see over-the-counter markets over-subscribed deals, 32 over-the-counter (OTC) markets, 42–43, 47 175 Index par, 49 pari passu (equivalent to), 69, 72 passive investment strategies, 128 payment blockage notice, 65 payment defaults, 91–92 payment subordination, 64–65 payment-in-kind (PIK), 74–75 performance, 97–111, 139 permitted acquisitions, 88 PIK see payment-in-kind PIMCO fund, 127, 129–130 Platt, Harlan, positive correlation, 105 The Predator’s Ball (Bruck), prepayments, 50, 51 prices/pricing, 32, 57, 101–103 primary markets, 6, 120 prime brokerage, 29 priming, 88 private equity firms, 7, 26 private investment funds, 143–145 private placement of debt, 70 project financing, 26 prospectuses, 31 qualified institutional buyers (QIBs), 34 ranking, 63–66, 70 rating agencies, 1–4, 115 ratings arbitrage, 40 see also credit ratings ratio debt, 87 recessions, 9–10, 13–14, 27–28, 109–111 see also Great Recession recoveries, 108–110, 116 refinancing, 27, 71 regulated investment companies (RICs), 128 Regulation S (Reg S), 35 relationship lending, 78 relative value, 37 remedies block, 65 research firms, 114–115 restricted payments, 88 restricted subsidiaries, 88 retail funds, 38, 125–126 returns, 45–48, 58, 103–104, 137–139 Revenue Reconciliation Act 1989, 10 revolving credit facilities, 69 RICs see regulated investment companies risk, credit, 32–33 risk measurement, 98 risk premiums, 55–56, 98, 115–116 risk-free rate, 54–56, 98, 115 risk-taking, excessive, 122–124 RJR Nabisco, Roberts, George, 7–8 rollover, 27 Rule, 144A, Securities Act 1933, 34–35 S&P see Standard and Poor’s rating agency S&P Capital IQ Leveraged Commentary and Data Group (S&P LCD) research, 114 S&P/LSTA Leveraged Loan index, 18–19, 99, 115 sacred rights, 91–92 Sarbanes-Oxley Act 2002, 34 seasoned issuers, 31 second lien loans, 65–66, 69–71, 148 secondary markets, Sections, loan credit agreements, 79–81 secured debt, 64 Securities Act 1933, 33–35 securities borrowing, 29 www.ebook3000.com 176 senior debt, 64–66, 69, 71–74, 145 senior notes, 64, 72–74 senior secured debt, 64–65 senior secured notes, 73–74 senior subordinated debt, 145 senior subordinated notes, 72–73 senior unsecured bonds, 69 seniority see ranking Sharpe ratio, 97–99, 108 short biased hedge funds, 149 short/long positions, 148–150 soft call protection, 51 speculative grade debt, spreads, 54–58, 115–119 Sprint Corporation, 19 Standard & Poor’s (S&P) ratings agency, 1–3 see also S&P… standstill, 65 structural subordination, 64, 68 structure, bonds, 72–74 structured finance, 36 subordination, 63–66 subsidiary companies, 66–68 supply and demand, 124–126 swaps, 45–48, 149–150 technical defaults, 91 telecom industry, 124 Texas International, third-party research, 114–115 total leverage ratio, 60 total return swaps (TRS), 45–48 total returns, 45–48, 97–100 TRACE see Trade Reporting and Compliance Engine INDEX tracking error, 20 issuer fundamentals, 119–122 liquidity, 44–45 Trade Reporting and Compliance Engine (TRACE), FINRA, 44, 115 transferability, 90 Treasury bonds, 99, 100, 103, 105–107 trends in issuer fundamentals, 119–122 TRS see total return swaps TXU Energy, 19 under-subscribed deals, 32 underwriting, 29, 30 underwritten offerings, 30 unitranches, 71 unrestricted subsidiaries, 88 unsecured debt, 64 Vanguard funds, 127, 129–130 Viacom, volatility, 37–38, 97–99, 101–103 Volcker Rule, 93–94 WARF score, 47 warrants, 146 weighted average rating factor (WARF) score, 47 yields, 54–58 yield-to-call, 58 yield-to-maturity, 58 yield-to-worst, 58 zero interest rate policy (ZIRP), 108 Compiled by INDEXING SPECIALISTS (UK) Ltd., Indexing House, 306A Portland Road, Hove, East Sussex BN3 5LP United Kingdom WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA www.ebook3000.com ... of high yield capital markets and investment banking My goal in writing High Yield Debt: An Insider’s Guide to the Marketplace is to explain the U.S corporate high yield market in basic terms and... not imagine any of those books being a desktop set or a day -to- day reference guide High Yield Debt: An Insider’s Guide to the Marketplace, on the other hand, is designed to address the needs of... excess of market average And Rajay did it! High Yield Debt: An Insider’s Guide to the Marketplace unravels the mystery of the high yield market chapter by chapter To put the topic in W xxi www.ebook3000.com