HIGH YIELD BOND

Sang Hai

Outline

Introduction History Issuers Investors Structure Q&A

Introduction

Junk Bond, speculative grade bond.

High risk – High reward

Introduction

Bank loans• High interest rates• Short/Intermediate – term loans• Application denied

Financing options• Long-term debt• Fixed interest rates• Varying payment structures

History - Beginning

Began in 1920s, Skyrocketing stock market

Collapsed in 1929, defaulted the low-grade bonds

General Motors, IBM, J. P. Morgan’s U.S. Steel

History – Michael Milken

Michael Milken “junk bond king”

Drexel Burnham

Started a high-yield bond trading department – 100% ROI

History – 1980s

$31 billion LBO of RJR Nabisco by private equity sponsor Kohlberg Kravis & Roberts in 1989

LBO - Leveraged Buyout

Hostile takeovers

industries were developed through junk bondsMCI vs AT&T, Texas Air(Texas International

Airline)

History – 1990s

The downfall of the economy in the late 80s caused many firms to default on their loans

Drexel went into bankruptcy in 1990$650 million fine in 1989 Unexpected crash of the junk bond market

Milken was sentenced to 10 years in prison for fraud, securities and tax violations

Current

U.S. Treasury market $10 trillion High yield bond $7.8 trillion Municipal bond $3.7 trillion

Issuers

Fallen Angel, LBO, Start ups

Investors

Insurance companies

Mutual funds

Pension funds

Structure

Payment-In-Kind (PIK)

Deferred-Interest

Split Coupon

Reference

http://www.econlib.org/library/Enc/JunkBonds.html

http://en.wikipedia.org/wiki/High-yield_debt

http://www.highyieldbond.com/

http://en.wikipedia.org/wiki/Michael_Milken

Question

“The point has always been to see the assets in the liabilities. To look beyond the debt and see what

value really exists and how more can be created.”- Michael R. Milken