High Yield Bonds - Oregon State University：高收益债券-俄勒冈州立大学

High Yield BondsXiong XiaoAgenda What is high yield bonds? The history of high yield bonds Characteristics and structures of high yield bonds Importance of high yield bonds to corporate finance SummaryHigh yield bond Bonds issued by low credits rating company Junk bonds or Noninvestment-rated bond or Speculative grade bond Normally issuers rating is lower than BBB(S&P) or Baa(Moodys) High default risk and high return Downgraded bonds Leveraged buyout/recapitalization Fallen AngelsBond rating systemHistoryHigh yield bonds began in 1920s1930sEarly issuers: IBM, General Motors etc.Late 1970s-1980s the golden period of high yield bondsGovernment deregulation (Liberal economic policies)Industry restructuring and reforming caused a huge wave of merger and acquisitionLeveraged buyoutsMichael MilkenJunk bond kingBelieves that the rewards of HYB outweighedthe default probabilitiesDrexel Burnham Lambert Investment bankHostile takeoverMilkens success soursDedicated to education industry & Prostate Cancer Foundation. 1984-1985the new issued high yield bonds were worth $14 billion and accounted for 22% of total corporate bond issued 1989-1990 the default rate of company increased rapidly due to economic downturn and excessive speculation. The high yield bonds market shrinked rapidly After 1991, high yield bonds market began to mature. Less speculative merger or acquisition, more capitalization and refinancingHistory Cont.History Cont. In 2011, high yield bonds account for more than $1 trillionCharacteristicsThe lower credit rating the higher default rate and credit spreadAverage default rate (1994-2007)Average credit spread (1998-2007)CharacteristicsThe lower credit rating the higher yield to maturityJunk BondsCharacteristicsReturn and risk are between treasury bond and stockStructuresThree types of deferred coupon structures:Deferred-interest bonds Bonds sold at a deep discount and do not pay interest for an initial period(3-7yrs)Step-up bonds Pay coupon interest at low rate for an initial period and then increase to a higher ratePayment-in-kind bonds Pay cash or a cash equivalent bond to bondholdersImportance to corporate finance Allows small or medium corporations to capitalize by issuing long term, fixed rate debt Shift the risk from taxpayers to specific bond investor group Investing public determine the interest rate base on companys potential(unlike commercial bank base on credits analysis) Give corporation opportunity to get access to public fundingSummary High yield bonds issued by low credit rating companies High yield bonds have high default risk and high return High yield bonds market started in 1920s and peaked in 1980s and matured in 1990s. Now high yield bonds account for more than $1 trillion Michael Milkenthe Junk bonds king Three types of deferred coupon structures Deferred-interest bonds Set-up bonds Payment-in-kind bondsPop Quiz1. High yield bonds also called?a) Investment-rated bondsb) Junk bondsc) James bond2. Who is the Junk bonds king?a) Michael Jacksonb) Michael Milkenc) Michael Jordan3. What is a Step-up bonds?a) Bonds sold at a deep discount and do not pay interest for an initial periodb) Pay coupon interest at low rate for an initial period and then increase to a higher ratec) Pay cash or a cash equivalent bond to bondholdersQuestions?Thank YouMake Presentation much more fun