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

IssuersFallen Angel, LBO, Start ups

Investors Insurance companies

Mutual funds

Pension funds

Structure Payment-In-Kind (PIK)

Deferred-Interest

Split Coupon

Referencehttp://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