High-yield debt
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In
Default risk
As indicated by their lower
In the case of high-yield bonds, the risk is largely that of default: the possibility that the issuer will be unable to make scheduled interest and principal payments in a timely manner.[2] The default rate in the high-yield sector of the U.S. bond market has averaged about 5% over the long term. During the liquidity crisis of 1989–90, the default rate was in the 5.6% to 7% range. During the COVID-19 pandemic, default rates rose to just under 9%.[3][4] A recession and accompanying weakening of business conditions tends to increase the possibility of default in the high-yield bond sector.[citation needed]
Investors
Institutional investors (such as
Some institutional investors have by-laws that prohibit investing in bonds which have ratings below a particular level. As a result, the lower-rated securities may have a different institutional investor base than investment-grade bonds. [citation needed].
U.S. market and indices
U.S. high-yield bonds outstanding as of the first quarter of 2021 are estimated to be about $1.7 trillion, comprising about 16% of the U.S. corporate bond market, which totals $10.7 trillion. New issuances amounted to $435 billion (~$505 billion in 2023) in 2020.[6][7]
Indices for the high-yield market include:
- ICE Bank of America US High Yield Total Return Index,[8]
- Bloomberg Barclays US Corporate High Yield Total Return Index,[9]
- S&P U.S. Issued High Yield Corporate Bond Index,[10] and
- FTSE US High-Yield Market Index.[11]
Some investors, preferring to dedicate themselves to higher-rated and less-risky investments, use an index that only includes BB-rated and B-rated securities. Other investors focus on the lowest quality debt rated CCC or distressed securities, commonly defined as those yielding 1500 basis points over equivalent government bonds. [citation needed]
Usage
Corporate debt
The original speculative grade bonds were bonds that once had been investment grade at time of issue, but where the credit rating of the issuer had slipped and the possibility of default increased significantly. These bonds are called "fallen angels".
The
In 2005, over 80% of the principal amount of high-yield debt issued by U.S. companies went toward corporate purposes rather than acquisitions or buyouts.[14]
In emerging markets, such as China and Vietnam, bonds have become increasingly important as short term financing options, since access to traditional bank credits has always been proved to be limited, especially if borrowers are non-state corporates. The corporate bond market has been developing in line with the general trend of capital market, and equity market in particular.[15]
Debt repackaging and subprime crisis
High-yield bonds can also be repackaged into collateralized debt obligations (CDO), thereby raising the credit rating of the senior tranches above the rating of the original debt. The senior tranches of high-yield CDOs can thus meet the minimum credit rating requirements of pension funds and other institutional investors despite the significant risk in the original high-yield debt.
When such CDOs are backed by assets of dubious value, such as
Such assets represent a serious problem for purchasers because of their complexity. Having been repackaged perhaps several times, it is difficult and time-consuming for
On March 23, 2009, U.S. Treasury Secretary Timothy Geithner announced a Public-Private Investment Partnership (PPIP) to buy toxic assets from banks' balance sheets. The major stock market indices in the United States rallied on the day of the announcement rising by over six percent with the shares of bank stocks leading the way.[20] PPIP has two primary programs. The Legacy Loans Program will attempt to buy residential loans from banks' balance sheets. The Federal Deposit Insurance Corporation will provide non-recourse loan guarantees for up to 85 percent of the purchase price of legacy loans. Private sector asset managers and the U.S. Treasury will provide the remaining assets. The second program is called the legacy securities program which will buy mortgage backed securities (RMBS) that were originally rated AAA and commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) which are rated AAA. The funds will come in many instances in equal parts from the U.S. Treasury's Troubled Asset Relief Program monies, private investors, and from loans from the Federal Reserve's Term Asset Lending Facility (TALF). The initial size of the Public Private Investment Partnership is projected to be $500 billion.[21] Nobel Prize–winning economist Paul Krugman has been very critical of this program arguing the non-recourse loans lead to a hidden subsidy that will be split by asset managers, banks' shareholders and creditors.[22] Banking analyst Meredith Whitney argues that banks will not sell bad assets at fair market values because they are reluctant to take asset write downs.[23] Removing toxic assets would also reduce the volatility of banks' stock prices. Because stock is akin to a call option on a firm's assets, this lost volatility will hurt the stock price of distressed banks. Therefore, such banks will only sell toxic assets at above market prices.[24]
EU member state debt crisis
On 27 April 2010, the
On 13 July 2012, Moody's cut Italy's credit rating two notches, to Baa2 (leaving it just above junk). Moody's warned the country it could be cut further.
With the ongoing deleveraging process within the European banking system, many European CFOs are still issuing high-yield bonds. As a result, by the end of September 2012, the total amount of annual primary bond issuances stood at €50 billion. It is assumed that high-yield bonds are still attractive for companies with a stable funding base, although the ratings have declined continuously for most of those bonds.[28]
See also
- Mezzanine capital
- Thomson Financial League Tables
References
- ISBN 0-7863-1095-2.
- ISBN 0-07-135862-5.
- ^ "America's high-yield debt is on ever-shakier foundations". The Economist. Retrieved 1 July 2021.
- ^ Thau op cit. p. 209.
- ^ Thau op cit. p. 211.
- ^ "The Economist op cit".
- ^ "Statistics". SIFMA Research. Retrieved 2 July 2021.
- ^ "ICE BofA US High Yield Total Return Index". Federal Reserve Bank of St. Louis. 31 August 1986.
- ^ "Bloomberg Barclays US Corporate High Yield Total Return Index". Bloomberg. Retrieved 3 July 2021.
- ^ "S&P U.S. High Yield Corporate Bond Index". Standard and Poors. Retrieved 3 July 2021.,
- ^ "FTSE US High-Yield Market Index". Yield Book. FTSE Russell. Retrieved 3 July 2021.
- ^ Thau op cit p. 208.
- ISBN 978-0-07-724612-9.)
{{cite book}}
: CS1 maint: multiple names: authors list (link - ^ Aaron Katsman (6 June 2012). "Need more retirement income? Look at high yield bonds". The Jerusalem Post.
- ^ "Vietnam's corporate bond market, 1990–2010: Some reflections" (PDF). The Journal of Economic Policy and Research, 6(1): 1–47. 15 March 2011. Archived from the original (PDF) on 26 September 2020. Retrieved 27 November 2010.
- ^ "The collapse of Lehman Brothers". The Daily Telegraph. Archived from the original on 9 March 2011. Retrieved 1 August 2014.
- ^ "Marketplace Whiteboard: Toxic assets". Marketplace. Archived from the original on 11 July 2012. Retrieved 20 March 2009.
- )
- SSRN 1321666.
- ^ Andrews, Edmund L.; Dash, Eric (24 March 2009). "U.S. Expands Plan to Buy Banks' Troubled Assets". New York Times. Retrieved 12 February 2009.
- ^ "FACT SHEET PUBLIC-PRIVATE INVESTMENT PROGRAM" (PDF). U.S. Treasury. 23 March 2009. Archived from the original (PDF) on 24 March 2009. Retrieved 26 March 2009.
- ^ Paul Krugman (23 March 2009). "Geithner plan arithmetic". New York Times. Retrieved 27 March 2009.
- ^ "Meredith Whitney: A Bad Bank Won't Save Banks". businessinsider.com. 29 January 2009. Retrieved 27 March 2009.
- SSRN 1343625.
- ^ Ewing, Jack; Healy, Jack (27 April 2010). "Greek Debt Rating cut to Junk Status". The New York Times. Retrieved 15 October 2020.
- ^ "Fears grow over Greece shockwaves". BBC News. 28 April 2010. Retrieved 4 May 2010.
- ^ "Portugal's debt is downgraded to junk status by Moody's". BBC News. 5 July 2011. Retrieved 5 July 2011.
- ^ "Fitch: High-Yields to Remain Good Alternative in Europe". CFO Insight Fitch. 12 December 2012. Archived from the original on 11 January 2013. Retrieved 12 December 2012.
External links
- Yago, Glenn (2008). "Junk Bonds". In OCLC 237794267.