In finance, high yield bonds ( non-investment grade bonds , speculative-level bonds , or junk bonds b>) are bonds that are rated below investment grade. These bonds have a higher risk of default or other bad credit events, but usually pay higher yields than better quality bonds to make them attractive to investors. Sometimes companies can provide new bonds as part of a yield that can only be redeemed after expiration or due date.
Video High-yield debt
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Any debt holder is subject to interest rate and credit risk, inflation risk, currency risk, duration risk, convexity risk, major risk repayment, stream revenue risk, liquidity risk, default risk, maturity risk, reinvestment risk, market risk , political risk, and tax adjustment risk. Interest rate risk refers to the risk of market value of a bond change due to changes in structure or interest rate or spread of credit or risk premium. Credit risk from high yielding bonds refers to the probability and likelihood of a loss on a credit event (ie, a default obligor on a scheduled payment or file for bankruptcy, or restructured bonds), or a credit quality change issued by a rating agency including Fitch, Moody, or Standard & amp; Poors.
Credit rating agencies attempt to describe risks with credit ratings such as AAA. In North America, five key institutions are Standard & amp; Poor's, Moody, Fitch Ratings, Dominion Bond Rating Service, and A.M. Best. Bonds in other countries may be assessed by a US rating agency or by a local credit rating agency. The scoring scale varies; the most popular rankings used (in order to increase the risk) ratings AAA, AA, A, BBB, BB, B, CCC, CC, C, with an additional rating D for debts already in arrears. Government bonds and bonds issued by government-sponsored companies (GSEs) are often considered to be in the zero risk category above AAA; and categories like AA and A can sometimes be subdivided into finer subdivisions like "AA-" or "AA".
Bonds and higher Bonds are called investment grade bonds. Bonds rated lower than the investment class on the date of their issuance are called speculative value bonds, or colloquial as "trash" bonds.
Lower grade debt usually offers higher yields, making speculative bonds an attractive investment vehicle for certain types of portfolios and strategies. Many pension funds and other investors (banks, insurance companies), however, are prohibited by their legislation from investing in bonds that are ranked below a certain level. As a result, low-ranking securities have different investor bases of investment grade bonds.
The value of speculative bonds is affected to a higher level of investment grade bonds with the possibility of default. For example, in recession interest rates may decline, and interest rate reductions tend to increase the value of investment grade bonds; However, the recession tends to increase the likelihood of defaults in speculative-grade bonds.
Maps High-yield debt
Usage
Company debt
The original speculative bonds bonds are bonds that were once an investment grade at the time of issuance, but where the issuer's credit rating has slipped and the possibility of default has increased significantly. These bonds are called "fallen angels".
Investment banker Michael Milken realizes that fallen angels are regularly judged less than what they value. The time with speculative class bonds starts with his investment in this regard. Only then did he and another investment banker at Drexel Burnham Lambert, followed by a competitor company, began to set up a bond issue that was a speculative value from the start. Speculative-level bonds were becoming ubiquitous in the 1980s as a financing mechanism in mergers and acquisitions. In leveraged buyout (LBO), the acquirer will issue speculative rate bonds to help pay for the acquisition and then use the target cash flow to help repay the debt over time.
In 2005, more than 80% of the high-yielded debt principal issued by US firms leads to corporate objectives rather than acquisitions or purchases.
In emerging markets, such as China and Vietnam, bonds are becoming increasingly important as financing options, as access to traditional bank loans has always proven to be limited, especially if the borrower is a non-state enterprise. The corporate bond market has grown in line with general trends of the capital market, and equity markets in particular.
Debt repackage and subprime crisis
High yield bonds can also be repackaged into secured debt obligations (CDOs), thus increasing the credit rating of senior tranche above the original debt rating. Thus, senior sections of high-yield CDOs can meet the minimum credit rating requirements of pension funds and other institutional investors despite significant risks in original high yield debt.
When the CDO is backed by dubious value assets, such as subprime mortgage loans, and market liquidity losses, bonds and derivatives become so-called "toxic debt". Holding such "toxic" assets led to the demise of several investment banks such as Lehman Brothers and other financial institutions during the 2007-09 subprime mortgage crisis and led the US Treasury Department to seek congressional funds to purchase the assets in September 2008 to prevent systemic crises of bank- bank.
The asset is a serious problem for buyers because of its complexity. After repackaging may be several times, it is difficult and time consuming for auditors and accountants to determine their true value. When the 2008-09 recession hit, their value declined further as more debtors failed, so they represent assets that depreciate quickly. Even assets that may have risen in value in the long run depreciate rapidly, quickly becoming "toxic" to the banks that hold them. Toxic assets, by increasing the variance of bank assets, can turn healthy institutions into zombies. Banks that have the potential to go bankrupt make too few good loans create a burdening debt problem. Alternatively, banks with the potential to go bankrupt with toxic assets look for speculative loans that are very risky to transfer the risk to depositors and other creditors.
On March 23, 2009, US Treasury Secretary Timothy Geithner announced a Public Private-Private Partnership (PPIP) to buy toxic assets from bank balance sheets. Major stock market index in the United States rallied on the day of the announcement rose by more than six percent with the shares of bank shares leading the way. PPIP has two main programs. The Legacy Loans program will try to buy housing loans from bank balance sheets. The Federal Deposit Insurance Corporation will provide non-recourse loan guarantees of up to 85 percent of the purchase price of legacy loans. Private sector asset managers and the US Treasury will provide the remaining assets. The second program is called an old securities program that will buy mortgage-backed securities (RMBS) initially rated AAA and commercial mortgage-backed securities (CMBS) and AAA rated asset-backed securities (ABS). The funds will come in many instances with equal portions of US Asset-Backed Assistance Program funds, private investors, and from loans from the Federal Term Asset Loan Facility (TALF). The initial size of Public Private Partnership Investment is projected to be $ 500 billion. Nobel Prize winning economist Paul Krugman has been very critical of the program by arguing that non-recourse loans lead to hidden subsidies that will be split by asset managers, bank shareholders and creditors. Banking analyst Meredith Whitney argues that banks will not sell bad assets at fair market value because they are reluctant to take over assets. Removing toxic assets will also reduce the volatility of bank stock prices. Because stocks are similar to call options on corporate assets, this lost volatility will harm the depressed share price of the bank. Therefore, these banks will only sell toxic assets above market prices.
High yield bond index
High yield bond indexes exist for dedicated investors in the market. The high-yield market indices include the US High S & P S & P Corporation Bond Index (SPUSCHY), CSFB High Yield II Index (CSHY), High US Citigroup Yield Market Index, Merrill Lynch High Yield Master II (H0A0), Barclays High Yield Index, and Bear Stearns High Yield Index (BSIX). Some investors, preferring to dedicate themselves to higher and less risky investments, use an index that only includes BB and B rated securities, such as the Global Index of BB-B Rated High Merrill Lynch (HW40). Other investors focus on the lowest quality assessed by CCC or depressed securities, usually defined as earning 1500 basis points over equivalent government bonds.
EU Member State Debt Crisis
On April 27, 2010, Greece's debt rating was downgraded to "junk" status by Standard & amp; Poor amid fears of default by the Greek Government. They also cut Portugal's credit rating by two levels to A, due to concerns about sovereign debt and public finances on April 28. On July 5, 2011, Portugal's rating was downgraded to "junk" status by Moody's (four notches from Baa1 to Ba2) saying there is an increasing risk that the country will need a second bailout before it is ready to borrow money from financial markets. again, and private lenders may have to contribute.
On July 13, 2012, Moody cut Italy's two-tier credit rating, becoming Baa2 (leaving it on top of the garbage). Moody warned the country could be cut further.
With the ongoing deleveraging process in the European banking system, many European CFOs still issue high yield bonds. As a result, at the end of September 2012, the total amount of primary bond issuance reached EUR50 billion annually. It is assumed that high yielding bonds still appeal to companies with a stable funding base, even though the ratings have declined steadily for most of the bonds.
See also
- Mezzanine capital
- Thomson Financial League table
References
External links
- Yago, Glenn (2008). "Rubbish Bonds". In David R. Henderson (ed.). Concise Encyclopedia of Economics (2nd ed.). Indianapolis: Library of Economy and Freedom. ISBN: 978-0865976658. OCLCĂƒ, 237794267. CS1 maint: Additional text : editor list (link)
Source of the article : Wikipedia
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