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High Yield Debt: An Insider's Guide to the Marketplace



"Rajay Bagaria has written the first book that captures a 360 degree view of the high yield debt market. Whether you are an investor, investment banker, corporate lawyer, CFO or layperson simply trying to gain insights into the fundamentals of high yield debt, this book translates financial and legal concepts, trends and structures of high yield bonds and leveraged loans into a simple, understandable format. Mr. Bagaria's book is a valuable resource for anyone involved in the new issue or secondary leveraged finance markets."
—Frank J. Lopez, Co-Head Global Capital Markets, Proskauer

"Bagaria does a great service for both high yield professionals and beginners by providing an accessible, well-written, insightful market primer."
—Steven Miller, Managing Director, S&P Capital IQ, Leveraged Commentary & Data

"High-Yield Debt: An Insider's Guide to the Marketplace is a comprehensive book that provides an in-depth understanding of the history, growth, basics and details of high-debt and the high yield market. The author gives insights that only an experienced professional can provide. The book will be invaluable to readers both starting out and knowledgeable about an important segment of corporate finance, dealing with concepts, structures and performance."
—Arthur Kaufman, Retired Partner, Fried, Frank, Harris, Shriver & Jacobson LLP / Member of Adjunct Faculty, Columbia Law School


High Yield Debt: An Insider's Guide to the Marketplace gives you an unmatched look at this profit-rich, often untapped market—currently more accessible than ever before to both institutional and individual investors around the globe.

Not all high yield exposure is the same, and this game-changing resource outlines the differences, but also goes beyond and identifies the advantages and disadvantages of each, as well as highlighting key investment strategies proven to perform at various periods of the economic cycle.

Detailed enough for everyday use, each chapter in this convenient reference book includes an introduction and a summary containing key insights to facilitate quick referencing. In addition, potentially confusing industry jargon is clarified and included in a glossary.

If you're looking for a concise and comprehensive guide to the high yield market, you've found it with High Yield Debt.

RAJAY BAGARIA is President and Chief Investment Officer of Wasserstein Debt Opportunities, a credit hedge fund Mr. Bagaria established with backing from Wasserstein & Co. He has been a Partner and Investment Committee member at Apollo Investment Management and an investor at Goldman Sachs & Co.'s Principal Investment Area.

Preface xi

Acknowledgments xvii

About the Author xix

Foreword xxi

CHAPTER 1 Development of the High Yield Industry 1

1.1 What is High Yield Debt? 1

1.2 The Importance of Credit Ratings 3

1.3 The Origins of High Yield 5

1.4 Advent of the Leveraged Buyout 7

1.5 Junk Bonds 9

1.6 Market Maturation and Growth 11

1.7 High Yield Today 13

1.8 Summary 14

CHAPTER 2 High Yield Issuers 17

2.1 High Yield Issuers 17

2.2 Capital Structure Considerations 21

2.3 Choosing Between High Yield Bonds and Leveraged Loans 22

2.4 High Yield Issuers by Industry 25

2.5 Purpose of High Yield Debt 25

2.6 The Role of Investment Banks 28

2.7 The High Yield Capital Raising Process 30

2.8 Summary 32

CHAPTER 3 Buying High Yield Debt 33

3.1 Who Can Buy High Yield Bonds? 33

3.2 Who Can Buy Leveraged Loans? 35

3.3 Buyers of High Yield Debt 35

3.4 Investment Mandates Impact Volatility 37

3.5 Collateralized Loan Obligations (CLOs) 38

3.6 Implications of an OTC Market 42

3.7 Tracking High Yield Liquidity 44

3.8 Total Return Swaps and Margin Finance 45

3.9 Summary 48

CHAPTER 4 High Yield Financial Concepts 49

4.1 Key Economic Terms of High Yield Debt 49

4.2 High Yield Call Protection 50

4.3 Fixed Versus Floating Rate Debt 52

4.4 Bond Yields, the Risk-Free Rate, and Credit Spreads 54

4.5 More Advanced Yield and Spread Concepts 56

4.6 Common Issuer Metrics Tracked 58

4.7 Summary 61

CHAPTER 5 Debt Structures 63

5.1 Ranking and Subordination 63

5.2 Operating and Holding Companies 66

5.3 Leveraged Loan Structures 68

5.4 High Yield Bond Structures 72

5.5 Payment-in-Kind Debt 75

5.6 AHYDO 75

5.7 Summary 76

CHAPTER 6 Credit Agreements and Legal Considerations 77

6.1 Loan Credit Agreements and Bond Indentures 77

6.2 Roadmap to High Yield Documentation 79

6.3 Affirmative and Negative Covenants 81

6.4 Incurrence-Based Versus Maintenance Covenants 83

6.5 Covenant-Lite - What Does It Mean? 85

6.6 More Advanced Credit Agreement Provisions 86

6.7 Sacred Rights and Bankruptcy Resolution 91

6.8 Recent Legislation 93

6.9 Summary 95

CHAPTER 7 High Yield Asset Class Performance 97

7.1 Total Returns, Volatility, and the Sharpe Ratio 97

7.2 Comparative Asset Class Performance 99

7.3 Annual Performance Variations 100

7.4 High Yield Bond and Leveraged Loan Price Volatility 101

7.5 Returns by Ratings 103

7.6 Beta and Correlation Analysis 104

7.7 Interest Rate Risk 106

7.8 Defaults and Recoveries 108

7.9 Summary 109

CHAPTER 8 Assessing the Market Opportunity 113

8.1 Sources of Market Information 113

8.2 How to Evaluate High Yield Credit Spreads 115

8.3 Putting Historical Credit Spreads into Context 118

8.4 Tracking Issuer Fundamentals 119

8.5 The Maturity Wall 122

8.6 Monitoring Excessive Risk-Taking 122

8.7 High Yield Supply and Demand 124

8.8 Summary 126

CHAPTER 9 1940 Act High Yield Investment Funds 127

9.1 The Investment Company Act of 1940 127

9.2 High Yield Mutual Funds 128

9.3 High Yield ETFs 132

9.4 High Yield Closed-End Funds 135

9.5 Comparison of Closed-End and Open-End Fund Returns 137

9.6 Business Development Companies 138

9.7 Summary 141

CHAPTER 10 Mezzanine Debt, Distressed Debt, and Credit Hedge Funds 143

10.1 Private Investment Funds 143

10.2 Mezzanine Debt Funds 145

10.3 Distressed Debt Funds 147

10.4 Credit Hedge Funds 148

10.5 Summary 150

Glossary 153

Index 169