HIGH YIELD BONDS: Market Structure, Portfolio Management, and Credit Risk Modeling

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McGraw Hill Professional, Apr 21, 1999 - Business & Economics - 574 pages
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HIGH-YIELD BONDS provides state-of-the-art research, strategies, and toolsNalongside the expert analysis of respected authorities including Edward Altman of New York UniversityOs Salomon Center, Lea Carty of MoodyOs Investor Service, Sam DeRosa-Farag of Donaldson, Lufkin & Jenrette, Martin Fridson of Merrill Lynch & Company, Stuart Gilson of Harvard University, Robert Kricheff of CS First Boston, and Frank Reilly of the University of Notre DameNto help you truly understand todayOs high-yield market. For added value and ease of reference, this high-level one-volume encyclopedia is divided into seven sections detailing virtually every aspect of high-yield bond investment. They include: Market structureNThe role of investment banks in security innovation and market development, evolution of analytical methodologies, and recent leveraged loan market developments; Security risk analysisNHistorical bond default rates, real interest rate and default rate relationships, and new simulation methodologies for modeling credit quality; Security valuationNImpact of seniority and security on bond pricing and return, important trading factors, and a Monte Carlo simulation methodology for valuing bonds and options in the context of correlated interest rate and credit risk; Market valuation modelsNEconometric studies which detail the importance of monetary influences, risk-free interest rates, default rates, mutual fund flows, and seasonal fluctuations; Portfolio managementNHistorical perspective and comparison to alternative investments, analysis of indices available to investors, and specific portfolio selection and risk management strategies of professional fund managers; Distressed security investingNHistorical risk and return information, plus an academic overview of the market and decision criteria for uncovering and investing in securities with higher-than-average risk-adjusted returns; Corporate finance considerationsNEmerging firmsO strategic choice between external debt and equity financing, as well as the choice of issuing public versus private (Rule-144a) securities. HIGH-YIELD BONDS provides extensive coverage of bond valuation and the construction and management of high-yield portfolios. Advanced Monte Carlo simulation models for the valuation of bonds and options on bonds as well as risk assessments on portfolios of bonds under conditions of correlated interest rate and credit risk are demonstrated. In todayOs explosive environment of multiple new issues and high risk versus return relationships, it is paramount that you get advice from analysts and experts who have been influential in shaping and defining the market. HIGH-YIELD BONDS will provide you with a valuable reference to this fascinating and constantly changing class of securities, helping you assemble a stable, diversified portfolio of fixed income investments that provides the greatest returns and the lowest risks.
 

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Contents

The High Yield Market
3
A Historic Perspective
17
Chapter
23
Rapid Increase in Risk of the Secondary Market in 1980s Relative to Decline
26
The Increased Importance of Diversification in a Global Linked
38
The Leveraged Loan Market
40
Spreads and Fees
45
Credit Statistics
52
Modeling the Yields on NoninvestmentGrade Bonds
271
Error Correction Models and ShortRun Dynamics
273
References
279
A Systematic
280
The January Effect in the Corporate Bond Market and Firm Size
286
Window Dressing
293
References
300
High Yield as an Asset Class
305

Secondary Loan Sales and Trading
59
The Globalization of the High Yield Market
61
PART TWO SECURITY RISK ANALYSIS
73
Historical Default Rates of Corporate Bond Issuers 19201996
75
Chapter 28
85
Recovery Rates
90
Chapter 12
91
Appendix
97
Almost Everything You Wanted to Know about Recoveries on Defaulted Bonds
104
Recovery Rates by Seniority within Industries
111
Chapter 7
117
Moodys Rating Migration and Credit Quality Correlation 19201996
119
Rating Transition Rate Volatility and Credit Quality Correlation
131
Conclusion
142
Modeling Bond Rating Changes for Credit Risk Estimation
156
Simulating Correlated Changes in the Credit Rating for a Portfolio of Bonds
162
Real Interest Rates and the Default Rate on High Yield Bonds
164
Modeling Default Rates with a Real Interest Rate Variable
170
PART THREE SECURITY VALUATION
175
Valuing LikeRated Senior and Subordinated Debt
177
Evidence from the Primary Market
183
How Does the Market Get It Right?
191
Appendix 10B Structural Subordination
197
Determinants of Spreads on New High Yield Bond Offerings
198
Creating a Multiple Regression Model
212
References
218
Analyzing a High Yield Issue
220
Senior Management
227
Valuing Bonds and Options on Bonds Having Correlated Interest Rate and Credit Risk
232
Credit Event
233
Utilizing Transition Matrices and Recovery Rates to Value Bonds
234
Monetary Influences on the High Yield Spread versus Treasuries
251
Garman Models Verdict on High Yield Markets Valuation
265
Key Conclusions
310
EquityCycle Component
330
An Analysis of High Yield Bond Indices
336
Composite High Yield Indexes
345
Time Series Results
362
How Many High Yield Bonds Make a Diversified Portfolio?
370
Credit Qualitys Impact on the Number of Issues Required
378
Managing a High Yield Portfolio
380
Yield Management
389
Monitoring a High Yield Portfolio
391
Modeling High Yield Bond Portfolios with Correlated Interest Rate
401
Simulation Methodology
402
PART
413
Do Seniority Provisions Protect Bondholders Investments?
415
Empirical Results
422
Summary and Conclusions
428
A Market Survey
431
Basic Restructuring Options
435
Passive Investment Strategies
442
Do Vultures Add or Subtract Value in a Reorganization?
466
Analyzing the Credit Risk of Distressed Securities
473
Creditors Committees
479
The Plan
482
Debt versus
489
Fundamental Issues
499
Importance of the Rating Agency on Bond Pricing
505
The Advantages and Disadvantages of Public versus Private Issuances
507
tF Federal Antifraud Provisions
519
The Advantages and Disadvantages of Public versus Private High Yield
527
Endnotes
534
Some Evidence on How Firms Choose between
546
Index
561
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Page 554 - any trust with total assets in excess of $5,000,000 not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Rule 506;
Page 554 - $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years
Page 549 - It directly or indirectly controls or is directly or indirectly controlled by or is under direct or indirect common control with an underwriter for an
Page 554 - director, executive officer, or general partner of the issuer, or any director, executive officer, or general partner of a general partner of that issuer;
Page 531 - Section 5 of the Securities Act requires that all securities offered by the use of the mails or other channels of interstate commerce be registered with the SEC, Congress
Page 554 - (1) any bank as defined in Section 3(a)(2) of the Securities Act or any savings and loan association or other institution whether acting in its individual or fiduciary capacity;
Page 456 - Claims When an investor purchases a claim against a financially distressed firm, a number of steps need to be taken to ensure that the investor is legally recognized as the new owner. In practice, one may encounter various hidden hazards during this process. Transfers of claims in Chapter
Page 449 - As Zell remarked at the time, “I clearly have no intention of being a bondholder . . . . If I'm going to make an investment, I'm going to be an owner of equity.” See Francine Schwadel. “Zell ‘Vulture Fund' Offers Investment in Carter Hawley,” The Wall Street Journal, July 25, 1991.
Page 472 - case. It normally consists of the seven largest unsecured creditors who are willing to serve. The UCC is empowered to investigate all aspects of the firm's business, which gives it access to proprietary company information not normally available to investors.
Page 554 - any private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940;

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About the author (1999)

Theodore M. Barnhill, Jr., Ph.D., is professor of finance and director of the Financial Markets Research Institute at George Washington University in Washington, D.C. Dr. Barnhill is a widely published financial researcher and author and the developer of the ValueCalc financial software (www.valuecalc.com). William F. Maxwell, Ph.D., is a visiting assistant professor of finance at Georgetown University, specializing in the areas of fixed income valuation and risk management. Dr. MaxwellOs work has been published in academic and professional journals. His professional experience includes security valuation and mergers and acquisitions. Mark R. Shenkman, MBA, is a pioneer in the field of high-yield bonds. Actively involved in the high-yield market for over two decades, Mr. Shenkman is the founder and chief investment officer of Shenkman Capital Management, a New York investment management firm that focuses exclusively on the high-yield market.

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