FREE ACCESS!
Subscribe for
Free Access
to over 4000+
pages of Profiles and Top
20 Rankings.
No obligation ever.
|
|
|
|
|
|
1.
|
Definition
|
| |
In
finance, a high yield bond (non-investment grade bond, speculative
grade bond or junk bond) is a bond that is rated below investment
grade at the time of purchase. These bonds have a higher risk of
default or other adverse credit events, but typically pay higher
yields than better quality bonds in order to make them attractive to
investors.
Global issuance of high yield bonds more than doubled in 2003 to
nearly $146 billion in securities issued from less than $63 billion
in 2002, although this is still less than the record of $150 billion
in 1998. Issuance is disproportionately centered in the U.S.A.,
although issuers in Europe, Asia and South Africa have recently
turned to high yield debt in connection with refinancings and
acquisitions. In 2006, European companies issued over €31 billion of
high yield bonds.
Other Resources:
-
Investor Force:
High Yield strategy involves investing in securities that pay
higher yields to compensate greater risk.
More…
Contribute to this section by clicking
▲
top
|
|
2.
|
Examples, Types, or
Variations
|
| |
High-yield bond indices exist for dedicated investors in the market.
Indices for the broad high yield market include the CSFB High Yield
II Index (CSHY), the Merrill Lynch High Yield Master II, and the
Bear Stearns High Yield Index (BSIX). 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, such at
the Merrill Lynch BB/B Index. Other investors focus on the lowest
quality debt rated CCC or Distressed securities, commonly defined as
those yielding 1000 basis points over equivalent government bonds.
Contribute to this section by clicking
▲
top
|
|
3.
|
Formula
|
| |
Contribute to this section by clicking
▲
top
|
|
4.
|
Related Terms
|
| |
Contribute to this section by clicking
▲
top
|
|
5.
|
As
Used in the Hedge Fund World
|
| |
Contribute to this section by clicking
▲
top
|
|
6.
|
Applications
|
| |
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 investment banker, Michael Milken, realized that fallen angels
had regularly been valued less than what they were worth. His time
with speculative grade bonds started with his investment in these.
Only later did he and other investment bankers at Drexel Burnham
Lambert, followed by those of competing firms, begin organising the
issue of bonds that were speculative grade from the start.
Speculative grade bonds thus became ubiquitous in the 1980s as a
financing mechanism in mergers and acquisitions. In a leveraged
buyout (LBO) an acquirer would issue speculative grade bonds to help
pay for an acquisition and then use the target's cash flow to help
pay the debt over time.
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.
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.
Contribute to this section by clicking
▲
top
|
|
7.
|
Misused
& Abused
|
| |
Risk:
The holder of a high yield bond is subject to interest rate risk
and credit risk. Interest rate risk refers to the risk of a bond
changing in value due to changes in the structure or level of
interest rates. The credit risk of a high yield bond refers to
the probability of a default (i.e., debtor unable to meet
interest and principal obligations) combined with the
probability of not receiving principal and interest in arrears
after a default. A credit rating agency attempts to describe the
risk with a credit rating such as AAA. In the USA, the three
major agencies are S&P, Moody's and Fitch Ratings. Bonds in
other countries may be rated by US rating agencies or by local
agencies like the Dominion Bond Rating Service (DBRS) in Canada.
Rating scales vary; the most popular scale uses (in order of
increasing risk) ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C,
with the additional rating D for debt already in arrears.
Government bonds are often considered to be in a zero-risk
category above AAA; and categories like AA and A may sometimes
be split into finer subdivisions like "AA (low)".
Bonds rated BBB and higher are called investment grade bonds.
Bonds rated lower than investment grade are colloquially
referred to as "junk" bonds. The lower-rated debt typically
offers a higher yield, making junk bonds attractive investment
vehicles for certain types of financial portfolios and
strategies. Many pension funds and other investors, however, are
prohibited in their by-laws from investing in bonds which have
ratings below a particular level. As a result, the lower-rated
securities may be harder to sell. In some cases the limited
market for junk bonds can lead to a dismal cycle in which a
company with financial difficulties will have its bond rating
lowered, and that makes it harder to raise money, thereby
deepening the company's financial troubles.
This cycle was one (but not the only) factor that accounts for
the sudden collapse of several high profile companies such as
Enron and WorldCom, whose bonds were not initially rated junk.
The value of junk bonds is affected to a higher degree than
investment grade bonds by the possibility of default. For
example, in a recession interest rates tend to drop, and the
drop in interest rates tends to increase the value of investment
grade bonds; however, a recession increases the possibility of
default in junk bonds.
When analyzing the risk of a high-yield bond, it is important to
keep in mind that the expected return from a basket of high
yield bonds should approximate that of a similarly diversified
list of high grade bonds. The low-rated bonds offer higher
promised returns but have a higher expected probability of
default, which means that a greater proportion of their expected
return comes from interest payments rather than principal. As a
result, they are less sensitive to interest rate swings,
allowing a high-risk company to more easily refinance its debt
even if interest rates have increased. The analysis of
high-yield debt has much in common with equity analysis, because
the viability of the company and its future cash flows determine
whether it will be able to repay the debt. The value of a
company's equity is considered a cushion beneath the debt of the
company, as a company with highly valued equity is likely to
have the operational and financial ability to repay debt, and
can issue more of its stock for additional financing.
Contribute to this section by clicking
▲
top
|
|
8.
|
Additional Sources of Information
|
| |
-
Books
-
News
-
Scholarly Papers
|
Back to Terms
| HEDGE FUND RISK AND OTHER
DISCLOSURES |
Hedge funds, including fund of funds (“Hedge
Funds”), are unregistered private investment partnerships, funds or
pools that may invest and trade in many different markets,
strategies and instruments (including securities, non-securities and
derivatives) and are NOT subject to the same regulatory requirements
as mutual funds, including mutual fund requirements to provide
certain periodic and standardized pricing and valuation information
to investors. There are substantial risks in investing in Hedge
Funds. Persons interested in investing in Hedge Funds should
carefully note the following:
- Hedge Funds represent speculative investments and involve a
high degree of risk. An investor could lose all or a substantial
portion of his/her investment. Investors must have the financial
ability, sophistication/experience and willingness to bear the
risks of an investment in a Hedge Fund.
- An investment in a Hedge Fund should be discretionary capital
set aside strictly for speculative purposes.
- An investment in a Hedge Fund is not suitable or desirable for
all investors. Only qualified eligible investors may invest in
Hedge Funds.
- Hedge Fund offering documents are not reviewed or approved by
federal or state regulators
- Hedge Funds may be leveraged (including highly leveraged) and
a Hedge Fund’s performance may be volatile
- An investment in a Hedge Fund may be illiquid and there may be
significant restrictions on transferring interests in a Hedge
Fund. There is no secondary market for an investor’s investment in
a Hedge Fund and none is expected to develop.
- A Hedge Fund may have little or no operating history or
performance and may use hypothetical or pro forma performance
which may not reflect actual trading done by the manager or
advisor and should be reviewed carefully. Investors should not
place undue reliance on hypothetical or pro forma performance.
- A Hedge Fund’s manager or advisor has total trading authority
over the Hedge Fund.
- A Hedge Fund may use a single advisor or employ a single
strategy, which could mean a lack of diversification and higher
risk.
- A Hedge Fund (for example, a fund of funds) and its managers
or advisors may rely on the trading expertise and experience of
third-party managers or advisors, the identity of which may not be
disclosed to investors
- A Hedge Fund may involve a complex tax structure, which should
be reviewed carefully.
- A Hedge Fund may involve structures or strategies that may
cause delays in important tax information being sent to investors.
- A Hedge Fund may provide no transparency regarding its
underlying investments (including sub-funds in a fund of funds
structure) to investors. If this is the case, there will be no way
for an investor to monitor the specific investments made by the
Hedge Fund or, in a fund of funds structure, to know whether the
sub-fund investments are consistent with the Hedge Fund’s
investment strategy or risk levels.
- A Hedge Fund may execute a substantial portion of trades on
foreign exchanges or over-the-counter markets, which could mean
higher risk.
- A Hedge Fund’s fees and expenses-which may be substantial
regardless of any positive return- will offset the Hedge Fund’s
trading profits. In a fund of funds or similar structure, fees are
generally charged at the fund as well as the sub-fund levels;
therefore fees charged investors will be higher that those charged
if the investor invested directly in the sub-fund(s).
- Hedge Funds are not required to provide periodic pricing or
valuation information to investors.
- Hedge Funds and their managers/advisors may be subject to
various conflicts of interest.
The above general
summary is not a complete list of the risks and other important
disclosures involved in investing in Hedge Funds and, with respect
to any particular Hedge Fund, is subject to the more complete and
specific disclosures contained in such Hedge Fund’s respective
offering documents. Before making any investment, an investor should
thoroughly review a Hedge Fund’s offering documents with the
investor’s financial, legal and tax advisor to determine whether an
investment in the Hedge Fund is suitable for the investor in light
of the investor’s investment objectives, financial circumstances and
tax situation.
All performance information is believed
to be net of applicable fees unless otherwise specifically noted. No
representation is made that any fund will or is likely to achieve
its objectives or that any investor will or is likely to achieve
results comparable to those shown or will make any profit at all or
will be able to avoid incurring substantial losses. Past performance
is not necessarily indicative, and is no guarantee, of future
results.
The information on the Site is intended for
informational, educational and research purposes only. Nothing on
this Site is intended to be, nor should it be construed or used as,
financial, legal, tax or investment advice, be an opinion of the
appropriateness or suitability of an investment, or intended to be
an offer, or the solicitation of any offer, to buy or sell any
security or an endorsement or inducement to invest with any fund or
fund manager. No such offer or solicitation may be made prior to the
delivery of appropriate offering documents to qualified investors.
Before making any investment, you should thoroughly review the
particular fund’s confidential offering documents with your
financial, legal and tax advisor and conduct such due diligence as
you (and they) deem appropriate. We do not provide investment advice
and no information or material on the Site is to be relied upon for
the purpose of making investment or other decisions. Accordingly, we
assume no responsibility or liability for a ny investment decisions
or advice, treatment, or services rendered by any investor or any
person or entity mentioned, featured on or linked to the Site.
The information on this Site is as of the date(s) indicated,
is not a complete description of any fund, and is subject to the
more complete disclosures and terms and conditions contained in a
particular fund's offering documents, which may be obtained directly
from the fund. Certain of the information, including investment
returns, valuations, fund targets and strategies, has been supplied
by the funds or their agents, and other third parties, and although
believed to be reliable, has not been independently verified and its
completeness and accuracy cannot be guaranteed. No warranty, express
or implied, representation or guarantee is made as to the accuracy,
validity, timeliness, completeness or suitability of this
information.
Any indices and other financial benchmarks
shown are provided for illustrative purposes only, are unmanaged,
reflect reinvestment of income and dividends and do not reflect the
impact of advisory fees. Investors cannot invest directly in an
index. Comparisons to indexes have limitations because indexes have
volatility and other material characteristics that may differ from a
particular hedge fund. For example, a hedge fund may typically hold
substantially fewer securities than are contained in an index.
Indices also may contain securities or types of securities that are
not comparable to those traded by a hedge fund. Therefore, a hedge
fund’s performance may differ substantially from the performance of
an index. Because of these differences, indexes should not be relied
upon as an accurate measure of comparison.
|
|
