Leveraged Finance: Concepts, Methods, and Trading of High-Yield Bonds, Loans, and Derivatives

CHAPTER 2

The High-Yield Bond Market

The high-yield bond market is a fairly dynamic asset class that has ■ had an evolving investment universe, with assets such as credit default swaps (CDS), synthetic indexes, and tranches of synthetic indexes—instruments described in later chapters of this book—being added to the mix. The market also has had a changing buy-side, with a trend of greater participation by hedge funds and equity investors and a decline in participation by mutual funds. In terms of the sell-side, the number of market participants is shrinking, in part due to both near-term (credit crunch, bankruptcies, mergers) and longer-term factors (increased transparency). Transparency was added to the market when the National Association of Securities Dealers (NASD) and the U.S. Securities and Exchange Commission (SEC) developed a program in 2002 requiring all members to report their transactions to the Trade Reporting and Compliance Engine (TRACE).

In this chapter, we provide an overview of the high-yield bond market and detail specific changes in the landscape.

THE REASONS COMPANIES ARE CLASSIFIED AS HIGH-YIELD ISSUERS

Why are companies rated double-B or below? There tend to be three reasons, which we detail here.

Original Issuers

“New” companies can have many positive characteristics—wonderful growth prospects, no burdensome legacy costs, and so on. That said, growing corporations can lack the stronger balance sheet and better income statement profile of more established ...