DUTCH COMMISSION ON BONDSA Standing Committee of Dutch Society of Financial Analysts, VBA

London

October 16th, 2003

Vereniging van Beleggingsanalisten

High Yield Bond Indices

• Introduction

• Objectives

• Features of High Yield Market

• Benchmark Selection Criteria

• HY Benchmark Analyzed

• Constrained Indices

• Final Remarks

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“ You cannot please everyone, but constructing a High Yield

Bond Index, seems to please nobody … ”

bdC INTRODUCTION October 2003

• Foundation of EMU

• Expansion of credit horizon

(beyond Investment Grade)

• Moderate inflation and interest rate

environment

bdC INTRODUCTION October 2003

INTRODUCTION October 2003

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Nominal volume US en Euro High Yield

0

100

200

300

400

500

600

ok

t-8

9

ok

t-9

0

ok

t-9

1

ok

t-9

2

ok

t-9

3

ok

t-9

4

ok

t-9

5

ok

t-9

6

ok

t-9

7

ok

t-9

8

ok

t-9

9

ok

t-0

0

ok

t-0

1

ok

t-0

2

bil

lio

n U

SD

US High Yield Euro High Yield

Source: Merrill Lynch USD and Euro High Yield Indices

OBJECTIVES October 2003

• To provide a fair, non-judgmental

and

transparant comparison of HY Bond

Benchmark

Indices

• Not to judge the attractiveness of

the HY market

• Not to give outspoken

recommendations

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FEATURES OF HIGH YIELD MARKET October 2003

• Low correlation with other asset

classes

• Both original HY issues & “fallen

angels”

• Public, non-convertible bonds,

issued by

corporates not being in default

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LOW CORRELATION October 2003

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1.0000.9600.25210-Year Treasuries

Selected Asset CategoriesJune 1992 – June 2002

1.0000.9950.0470.5150.2470.1230.052(0.005)0.131Russell 1000

0.687

Russell1000

0.644

1.000

S&P500

0.022

0.141

(0.053)

0.093

0.251

0.274

0.284

1.000

3-MonthTreasuries

3-MonthTreasuries

1.0000.1930.4740.1330.030(0.051)(0.110)Russell 2000

0.0460.5050.2590.1330.0650.013S&P 500

1.0000.8520.867Mortgage Backed

Russell2000

1.000

LeveragedLoans

0.391

1.000

HYBonds

0.004

0.467

1.000

HGCorporates

(0.086)

0.310

0.870

MortgageBacked

(0.133)(0.133)Leveraged Loans

0.1740.127High Yield Bonds

0.9030.869High GradeCorporates

1.0005-Year Treasuries

10-YearTreasuries

5-YearTreasuries

Source: PIMCO, Merrill Lynch & Co., Loan Pricing Corporation, Standard & Poor’s, Russell Indices

BENCHMARK SELECTION CRITERIA October 2003

Quality of the index• Transparency

• Availability

• Consistency

• Flexibility

Practical usefulness of the index• Replicability & Investibility

• Representativeness

• Relevancy

• Acceptance

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Index Providers• CSFB

• JP Morgan

• Lehman Brothers

• Merrill Lynch

• Citigroup

bdC HY BENCHMARKS ANALYZED October 2003

bdCFlagship highyield indices

Sub indices Family members

CSFB CSFB HighYield (1986)

Available by rating, sector, region, etc. Developed countries only index, Western European HYIndex (subindex non-US$ denominated bonds

USD GlobalHigh Yield Index(1994)

USD Domestic, USD developed and USDEuropean High Yield Index. Subdivisionavailable by rating and sector

JP Morgan(formerChaseIndices)

Euro High YieldIndex (1999)

Subdivision available by rating and sector European Currency High Yield Index (Euro and Sterling),Sterling High Yield Index, European aggregate High YieldIndex

US High Yieldindex (1986)

Subdivision available by rating andmaturity type

Global High Yield index (US, pan European, Emergingmarkets and HY CMBS)

LehmanBrothers

Pan EuropeanHigh Yield index(1999)

Euro High Yield index and Non EuroHigh Yield index (GBP currently)Subdivision not available yet due tolimited number of issues

Euro High Yield index and Non Euro High Yield index(GBP currently), Global High Yield index (US, panEuropean, Emerging markets and HY CMBS)

US High YieldMaster II Index(1986)

Cash Pay Only Index (first high yieldindex) and Deferred Interest Bonds IndexSubdivision available by rating

Global High Yield index (US, Europe and Canada)Specific:High Yield 175 index

Merrill Lynch

Euro High YieldIndex (1997)

Subdivision available by rating Global High Yield index (US, Europe and Canada),European currency High Yield Index (Euro and Sterling),Sterling High Yield Index

Citigroup(formerSalomon SB)

US High-YieldMarket Index(1989)

High Yield Cash-Pay index, Deferred-Interest indexSubdivision available by rating andmaturity sector

Family:Bankrupt/ default index, Safest of High Yield

HY BENCHMARKS ANALYZED October 2003

HY BENCHMARKS ANALYZED October 2003

Criteria• Eligible Currency

• Maturity

• Domicile and Market Type

• Coupon Type and Structure

• Rating

• Size

• Construction Methodology and Pricing

• Data Sources and Availability

• Returns and Composition

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CONSTRAINED INDICES October 2003

bdCConstrained indices Additional rules

CSFB CSFB High yieldIndex (1986)

if issuer has more then 2 issues outstanding then the two most liquidare selected for inclusion

USD Global HighYield Index (1994)

if issuer has more then 2 issues outstanding then the two largest areselected for inclusion, if difference is size is less or equal to 20 %other criteria such as security type or seniority will be used

JP Morgan(formerChaseIndices)

EUR High YieldIndex (1999)

Currently the index is not constrained but the above constrained willbe implemented if they index reaches 100 issues, currently not thecase

US High Yield MasterII Constrained Index(2002)

Max 2 % per issuer, Iterative algorithm is used by which issuers inexcess of 2 % are reduced to 2 %, with pro rata increase of the otherissuers

MerrillLynch

Euro High YieldConstrained Index(2002)

Max 3 % per issuer, Iterative algorithm is used by which issuers inexcess of 3 % are reduced to 3 %, with pro rata increase of the otherissuers

Citigroup(formerSalomon SB)

US High-Yield MarketIndex Capped Index(2002)

Issuer weight capped at 5 bn nominal USD per issuer, proportionalreduction of included issues until the 5 bn limit is satisfied

Seasoning period of one full calendar month for fallen angels beforethey enter the index

FINAL REMARKS October 2003

Constrained Indices• Control maximum weights

• Seasoning

Conclusions• No outspoken recommendations due to diversity

• Booklet meant to be a useful tool for structuring

the benchmark

selection process and sorting out the

implications of a certain

choice

• Dialogue needs to be continued in order to

improve the quality of

benchmarks

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Telephone/e-mail

Rolf-Pieter ter Horst + 31 20 563 8048 rolf-pieter.ter.horst@ingbank.comChairman

Jurgen Aarts + 31 30 257 6183 jurgen.aarts@fortis.comVice Chairman

Irene Ruis + 31 30 232 9212 iruis@spfbeheer.nlSecretary

Koos ‘t Hart + 31 20 583 4484 j.thart@sfbgroep.nlAdvisor

Internet

Dutch Society of Financial Analysts (VBA) & www.nvba.nlDutch Commission on Bonds (DCB)

INFORMATION October 2003

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