Post on 24-Feb-2016
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C O R E Y B RA M L E T
HIGH YIELD BONDS (JUNK BONDS) AND
THEIR HISTORY
HIGH YIELD BONDS
• A bond that is rated below investment grade• Non-Investment Grade• Speculative Grade• “Junk”
• Lower-rated bonds involve more risk, and therefore offer higher yields
• The U.S. junk bond default rate 2010 – 13-14%
• The U.S. junk bond default rate 2007 – less than 1%
RATINGS
•
JUNK
TERMINOLOGY
• Original-Issue High Yield Bonds • A bond rated non-investment grade at time of issuance
• Fallen Angles• Rated investment grade and has “fallen” to non-
investment grade
• Rising Stars• Non-investment grade and has “risen” to investment
grade
BUYOUTS
• Leveraged Buyout (LBO)• The assets of the acquired company are used as
collateral for the borrowed capital• Ironically a company’s success can be used against itself
as collateral
• Management Buyout (MBO)• A buyout led by existing management
LBO/MBO - PROS AND CONS
Pros:• Improve market value and increase efficiency• Increased personal stake gives managers and
employees incentive to succeed
Cons:• High financial pressure - Increased risk of default• MBO gives existing management the incentive to
devalue their stock ???
ROLE OF HIGH YIELD BONDS
• Shift risk from commercial banks to the public investing market
• Opportunity for a corporate segment to access a larger pool of funds
• Market sets the interest rates
WHO CAN’T PLAY?
• Commercial Banks• Insurance Companies• Pension Funds
• Prohibited in their bi-laws from investing in bonds below a particular level
DREXEL BURNHAM LAMBERT
• Michael Milken “The Junk Bond King”
• Realized fallen angels had regularly been valued less than what they were worth
• Money raising ability facilitated the activities of leveraged buyouts (1980’s Boom)
• "There is no shortage of capital; there is only a shortage of management talent“
• Indicted on 98 counts of racketeering and securities fraud in 1989
• Milken pleaded guilty to six counts of securities and tax violations in 1990
MICHAEL MILKEN (CONTINUED)
• 1993 – Milken diagnosed with prostate cancer
• Today- • Founded Milken Family Foundation to support medical
research and education• Founded the Prostate Cancer Foundation
REFERENCES• http://www.reuters.com/article/2010/03/04/defaults-bonds-moodys-idUSN0412669120
100304
• http://en.wikipedia.org/wiki/High-yield_debt
• http://www.moodys.com/
• http://en.wikipedia.org/wiki/Michael_Milken
• http://money.cnn.com/2007/12/06/markets/junk_bonds/index.htm
• Brealey, Myers, Allen. Principles of Corporate Finance 10th Edition, 2010
• Fabozzi, Modigliani, Jones. Foundations of Financial markets and Institution 4th Edition, 2010
QUESTIONS ?