May 2015
VOLUME 2 • Issue 2
Triple C-Rated Corporate
Bonds and Loans
Fool’s Gold or Buried Treasure?
> A credit rating captures only a part of the risk profile of a
corporate debt instrument.
> Where an investment is made in a corporate capital
structure is a major consideration, but the true position of
an investment is not always easy to identify.
> Augmenting fundamental analysis with legal and
structural analysis is key to identifying attractive
opportunities and truly understanding the risk/reward
components of an investment.
Scott M. McAdam, CFA
Portfolio Specialist
Mr. McAdam joined DDJ as head trader in 2006 and joined the Business
Development and Client Service team in 2011. He is a member of the Investment
Review Committee and works to communicate DDJ’s investment philosophy and
strategies with clients, consultants and prospects.
Stony Brook Office Park | 130 Turner Street | Building 3, Suite 600 | Waltham, MA 02453
Phone 781.283.8500 Web ddjcap.com
Triple C-rated Corporate Bonds and Loans
Executive Summary
Imagine strolling along a little-known, wooded trail. As you pass by a brook, a shiny, sparkling
object gleams at you from beneath the surface. In fact, you see many of them dotting the
sandy bed of the brook. Who wouldn’t be excited by the prospect of discovering a field of
gold nuggets? All of those little glittering bits must be the real thing, right?
Unfortunately, you probably would be experiencing the same misperception that duped
thousands of 19th century prospectors and miners. To the untrained eye, the mineral iron
pyrite, commonly known as “fool’s gold”, appears to represent great value and riches to
those who find and capture it. But, in fact, this shiny imposter offers very little in the way
of reward for someone who makes the effort of wading around in the cold, rapidly moving
water to pick up these near-worthless rocks.
However, all hopes of gilded riches may not be lost. Sometimes iron pyrite is found in close
proximity to small amounts of gold. Consequently, astute prospectors may be able to discover
that beneath the first layer of the brook’s bed lies little pockets of value, the harvesting of
which may yield a good return for their efforts, providing of course, that they can discern the
difference between an ordinary mineral and a much more valuable chemical element.
In our view, the prospector’s task is similar to active investing in non-investment grade
(also known as “high yield”) bonds and loans, particularly those corporate debt instruments
that carry a “triple C” rating.1 This paper will further explore the potential rewards and
accompanying pitfalls associated with investing in such space.
High Yield Bond Ratings: Three Main “Buckets”
The non-investment grade corporate bond and loan markets comprise issuers that have been
assigned a rating of “double B” or below. Exhibit 1 shows the non-investment grade ratings
systems used by the two most popular credit ratings agencies: Moody’s Investors Service
(“Moody’s”) and Standard & Poor’s Financial Services (“S&P”).2
Exhibit 1: Non-Investment Grade U.S. Corporate Debt Ratings
Category
Moody’s
S&P
Category
Moody’s
S&P
“Double B”
Ba1
BB+
Other
Ca
CC
Ba2
BB
C
C
Ba3
BB-
D
D
B1
B+
B2
B
B3
B-
Caa1
CCC+
Caa2
CCC
Caa3
CCC-
“Single B”
“Triple C”
Defaulted
Source: Moody’s, S&P.
1
Moody’s Investors Service and Standard and Poor’s Financial Services use a different nomenclature for their ratings system. For example, the Moody’s
equivalent to a S&P rating of CCC+ is Caa1. For purposes of this paper, we shall refer to both such ratings as “Triple Cs”. For information on the rating
agencies’ methodology go to: https://www.moodys.com or www.standardandpoors.com.
An easy way to remember each agency’s nomenclature is to think of S&P as S+P since it uses the + and – signs, while Moody’s uses the lower case letter “a”
and numbers.
2
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2
Triple C-rated Corporate Bonds and Loans
Exhibit 2 shows select characteristics of each ratings category of the BofA Merrill Lynch
Global High Yield Index (Developed Markets).3
Exhibit 2: High Yield Bond Market Characteristics, March 31, 2015
High Yield Market4
Double Bs
Single Bs
Triple Cs
Number of Bond Issuers
1,295
437
648
353
Market Value ($Bn)
$1,717
$863
$639
$214
Average Yield (worst call)
5.74%
4.16%
6.23%
10.69%
Average Spread vs.
Treasuries
462 bps
305 bps
509 bps
957 bps
Average Years to Maturity
6.27
6.67
6.05
5.35
Average Coupon
6.63%
5.76%
7.05%
8.49%
Average Duration
4.24
4.73
3.94
3.16
Source: BofA Merrill Lynch HY Credit Chartbook.
See Appendix for definitions.
The largest ratings bucket within the high yield universe consists of double B bonds, which
accounts for approximately half of the entire high yield bond market as measured by
market value. Single Bs are second at 37%, with triple Cs representing only around 12% of
outstanding high yield bonds.
Each category has distinct features that, in general, tend to influence how the bonds perform
during certain market conditions. For example, since investors generally view double B-rated
issuers as being of higher credit quality than the other ratings categories, double B issuers are
able to issue bonds with longer maturities and lower coupons than the other categories. Such
bonds have a high sensitivity to changes in Treasury rates (as reflected by the higher duration).
Consequently, during time periods of dramatic Treasury rate declines,5 double B bond
returns usually benefit to a greater extent as a result of such declining rates than single B
and triple C bonds.
Conversely, triple C bonds generally have shorter maturities and higher coupons (i.e., lower
duration) and, therefore, experience less sensitivity to Treasury rate moves, a characteristic
that can be particularly attractive to investors during periods of rising rates. However, triple
C bonds have earned their low rating due to increased susceptibility to adverse business
events, driven either by macroeconomic or company-specific factors, that may derail an
issuer from making its promised interest and principal payments.
Triple Cs Under the Microscope
According to Moody’s,6 a triple C rating is assigned when an issuing company’s debt is considered to be “speculative”, “of poor standing” and “subject to very high credit risk” in regard to
the “likelihood of default as well as any financial loss suffered in the event of a default” over the
We are using high yield bond data as a proxy for the entire leveraged credit market (high yield bonds and loans).
3
Includes developed markets.
4
Declining interest rates have, essentially, been the trend over the past 34 years, but probably not so going forward.
5
For simplicity, we focus only on Moody’s ratings.
6
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Triple C-rated Corporate Bonds and Loans
While the high
historical returns
medium term. Moody’s ratings are meant to address two distinct concerns: a) the probability
that an issuer will default,7 and b) how much capital may be lost should a default occur.
Typically, the credit ratings agencies assign ratings upon the issuance of a new bond or loan.
generated by
Ratings are then reviewed periodically (the depth of such reviews, however, is arguable). Over
triple C bonds
the issuer.
shine brightly
The Sparkling Returns of Triple Cs
to investors, we
1999, including the returns of each ratings class.
believe that the
Exhibit 3: Annualized Returns (%) of U.S. IG & High Yield Bonds by
Ratings Class (January 1, 1999–March 31, 2015)
glitter is mostly
fool’s gold.
time, ratings can be upgraded or downgraded, depending on the operating performance of
The chart below displays return data for investment grade (“IG”) and high yield bonds since
US IG
US HY
AAAs
AAs
As
BBBs
BBs
Bs
CCCs
—
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
Annualized Return (%)
Source: BofA Merrill Lynch HY Credit Chartbook.
Past performance does not guarantee future results.
US IG
Over the past 16-plus years, triple C issuers generated the highest total return of all the U.S.
US HY
investment grade and non-investment grade ratings buckets. Although the high historical
returns generated by triple C bonds shine brightly to investors, we believe that the glitter is
AAAs
mostly fool’s gold. While treasure is often present among the mineral scrap heap, unearthing
AAsgold-laden issuers lying within it takes special knowledge, experience and hard work.
actual
As
Risk-Adjusting
Triple C Returns Reveals Their True Chemistry
It is
no secret that high returns attract investors and that the triple C segment of the market
BBBs
is the most subject to momentum trading during times of market exuberance (greed) and
BBs
depression (fear).8 What is often forgotten by those who chase returns and yield, however,
is theBs
second pillar of prudent investing, namely the amount of risk that must be borne to
9
achieve
CCCs a certain return.
A “default” is defined by Moody’s as the failure to promptly pay interest or principal when due, but can also include a bankruptcy filing or a distressed
0.00
0.05
0.10
0.15
0.20
0.25
exchange. Typically a company that defaults on an interest payment on a bond has 30 days to cure such default, after which time creditors can elect to
pursue remedies, including forcing the issuer into bankruptcy.
7
Sharpe Ratio
Triple C bond sensitivity to market fluctuations is reflected in its beta of 1.44x versus the BofA Merrill Lynch U.S. High Yield index for the past five years.
8
With the third pillar being the correlation of returns to other assets/positions.
9
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Triple C-rated Corporate Bonds and Loans
US IG
The most common definition of investment risk, according to Modern Portfolio Theory (MPT),
US HY
is the standard deviation of the returns generated by an investment, which is a measure of
the volatility of those returns. According to MPT, the higher the volatility (standard deviation)
AAAs
of the returns of an investment, the riskier the investment, and vice versa. Using standard
AAs
deviation,
investors can compare the return to the risk of an asset, a relationship that is
captured
As in the Sharpe Ratio.10
BBBs 4 displays Sharpe Ratios for the ratings categories of corporate bonds that were
Exhibit
presented
in Exhibit 3. Here, the magnetism of triple Cs is quite different. When considering
BBs
the amount of risk, investing in triple Cs appears to be folly when compared to investments
Bs
in the other ratings buckets and the investment grade and non-investment grade markets
asCCCs
a whole. Based solely on this analysis, triple Cs appear to represent the corporate debt
version of iron pyrite.
—
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
Exhibit 4: Sharpe Ratios of U.S.
IG & High
Bonds by Ratings Class
Annualized
ReturnYield
(%)
(January 1, 1999–March 31, 2015)
US IG
US HY
AAAs
AAs
As
BBBs
BBs
Bs
CCCs
0.00
0.05
0.10
0.15
0.20
0.25
Sharpe Ratio
Source: BofA Merrill Lynch HY Credit Chartbook.
Past performance does not guarantee future results.
However, just as there is sometimes actual gold below a level of worthless iron pyrite, there
can be strong risk-adjusted returns generated by investing in triple Cs, as long as the investor
has the requisite knowledge and expertise needed to uncover such nuggets of value. Again,
such knowledge and expertise is not common and requires years of experience to develop. It
involves not only the ability to derive a reliable estimate of the enterprise value of a corporate
entity, but also, equally as important, a profound understanding of the legal and structural
elements of the corporation’s debt instruments.
Employing standard deviation and the Sharpe ratio is a common and reasonably effective
method to measure the investment risk of an asset and compare it to another potential
investment. However, relying solely on such statistical measurements does not provide an
investor a full appreciation of risk, particularly the distinct risk of a debt obligation that is
traded over-the-counter as opposed to a stock traded on an exchange.
The Sharpe Ratio equals the excess return of an investment over the risk-free rate (typically 3-month Treasury bills) divided by the standard deviation of the
investment’s returns.
10
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Triple C-rated Corporate Bonds and Loans
Default rates
Many stocks trade often (i.e., are liquid), which can provide real-time investor information and
explain only
with some issues, particularly triple Cs, trading infrequently and through a limited number of
part of the risk
have less to do with the relative attractiveness of the issue and more with the result of the
framework
associated with
investing in
triple Cs.
sentiment on the risk of investing in that stock. Bonds and loans are typically far less liquid,
market makers. Moreover, when triple Cs do trade, there are often wide price variations that
impact of bid/ask spreads and trading illiquidity. Consequently, standard deviation-based
metrics, which may be exacerbated by such trading inefficiencies, reveal only a part of the
risk makeup of an investment.
Next, we discuss other methods of risk assessment that can be used to augment standard
deviation and the Sharpe ratio.
Default & Recovery Rates
Moody’s uses the risk-laden language detailed earlier when describing triple Cs for good
reason—triple C bonds and loans default at a much higher rate than similar investments in
the other ratings categories. The table below shows default rates by non-investment grade
ratings categories, using both the original rating when the debt was first issued and the
rating assigned 12 months before the default occurred.
Exhibit 5: Average Default Rates by Ratings Category, 1995-2014
Default Rate
Double B
Single B
Triple C
Using Rating at Time of Issuance
1.2%
3.2%
6.0%
Using Rating 12 Months Before Default
0.9%
2.7%
5.8%
Source: JP Morgan “Default Monitor,” March 31, 2015. Data reflects the 20-year average as of December 31, 2014.
Past performance does not guarantee future results.
On average, triple C debt instruments defaulted almost twice as frequently as single Bs and
about five times more than double Bs. The clear implication from these historical results
is that bonds rated triple C have a higher probability of defaulting than bonds in the other
ratings buckets. But, as we observed in Exhibit 3, even with more frequently occurring
defaults, triple Cs still produced higher returns than each of the other ratings buckets.
Ostensibly, investors are aware of the increased standard deviation and default risk of
triple Cs but nonetheless continue to purchase such bonds. One reason for this seemingly
contradictory behavior is the possibility that like standard deviation, the actual default rate
only explains part of the risk framework associated with investing in triple Cs.
Losses from Defaults
In most cases, a company defaulting on its debt obligation(s) portends capital losses, but
sometimes the actual losses are either relatively small, or, if the position is held over a long
enough period of time, partially or wholly offset by the instrument’s coupon payments received
prior to the eventual default. In some cases, a handsome profit may even be generated by a
defaulted triple C. In fact, even though a company can have a high probability of default, the
actions a company takes following its default are critical in determining whether an investment
will eventually be deemed successful or unsuccessful. For example, will the issuer’s management
team reduce headcount, seek further equity investment, or perhaps discontinue certain
operations? Such decisions can significantly affect the ultimate fate of a defaulted investment.
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Triple C-rated Corporate Bonds and Loans
Given the historical data, triple Cs clearly have a higher probability of default. But when
we analyze the final value that an investor eventually recovers (known as the recovery rate,
or the percentage of the initial investment recovered) from defaulted triple C investments
compared with other ratings categories, we observe a surprising outcome: there is little
difference in recovery rates between the three main ratings buckets.11
Exhibit 6: Recovery Rates and Moody’s Corporate Ratings, 1987-2006
12
100
Percent
80
60
40
20
0
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Ca
C
Source: Moody’s Special Comment: Moody’s Ultimate Recovery Database, April 2007. Data reflects annual results.
Past performance does not guarantee future results.
Exhibit 6 shows recovery rates of defaulted bonds and loans broken down by all noninvestment grade ratings categories for the period of 1987 to 2006.13 Interestingly, two of the
three triple C-rated debt categories (specifically, the relatively higher quality Caa1 and Caa2
issues) recovered nearly as much, or more, than the three double B-rated debt categories
(Ba1, Ba2, and Ba3). Furthermore, recovery rates on all triple C debt categories compared
reasonably well to the single B categories (B1, B2, and B3). Based on these results, we can see
that historically, default losses suffered from investing in triple Cs are not much different than
losses suffered from other below investment grade ratings categories.
Given the similarity of recovery rates across the ratings buckets, it can be concluded that
even though Moody’s’ initial ratings are generally good at reflecting overall credit quality
(and hence, the probability of default), the ratings may not be as effective a predictive
indicator of actual losses that may be realized after a default occurs, particularly for a
long-term investor. In their defense, Moody’s ratings ultimately do a good job highlighting
the incremental risk of capital loss but mostly because its fundamental credit analysis
helps the agency assess reasonably well the probability of default amongst the various
ratings categories.
According to Moody’s, “three alternative methods are used to derive nominal valuations on these obligors’ debts at the time of resolution” with the “method
Moody’s considers to be the most representative of the actual recovery” used for this analysis.
11
Rating at time of issuance.
12
The study began following the introduction of Moody’s loss-given-default (LGD) assessments. Unfortunately, a more recent study including data updated to
the present is not available at the time of publication of this paper. However, the author believes that the time period used is representative of recovery rates
that may be expected over more recent time periods.
13
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Triple C-rated Corporate Bonds and Loans
To illustrate, combining the 6.0% triple C default rate with the 57% recovery rate (conversely,
a 43% capital loss) for Caa1 issues results in an ultimate default loss of roughly $2.60 for
every $100 invested in Caa1 issues. As expected by their higher rating, for double Bs, the
default loss is markedly lower, as the default rate of only 1.2% combined with a 52% recovery
(48% capital loss) for Ba2 issues leads to only $0.57 of default losses per every $100 invested.
Default losses, however, fail to tell the whole story when assessing the risk of investing in triple
Cs, because again, even when actual losses are factored in, their returns are still higher than
the other ratings buckets. As a result, it appears that, as a whole, investing in triple Cs are a risk
worth taking; yet, we have previously identified other data that conflicts with this conclusion.
These contradictions make it evident that knowledge and expertise are crucial to finding and
exploiting the most favorable reward-versus-risk investment opportunities.
The Power of Priority
Corporations typically finance their operations with a combination of debt and equity capital,
often by issuing multiple versions (or “tiers”) of each. For example, a company may have a multitiered capital structure that (in keeping with our gold mining theme) resembles a multi-layered
geologic stratification, such as follows:
Exhibit 7: The Stratification of a Multi-tiered Geologic/Capital Structure
Priority of Stratum/Payment
Geologic Formation
Corporate Capital Structure
1st
Silt
Bank Line of Credit
2nd
Sand
First Lien Term Loan
3rd
Gravel
Second Lien Term Loan
4th
Clay
Senior Unsecured Bonds
5th
Limestone
Subordinated Bonds
6th
Shale
Preferred Stock
7th
Bedrock
Common Stock
Unlike a prospector, who would carefully examine each stratum of rock for gold, investors
typically choose from only one or two layers of any given capital structure to find a way
to extract an attractive expected return given the risks incurred. And, as with any geologic
mining endeavor, focusing on certain layers will provide better rewards than others.
For example, investors at the top of the priority of payment queue are typically well-protected
if a company defaults on a debt obligation and seeks a remedy through the U.S. legal system.
So in a simple case in which a company has defaulted on its debt obligation(s) and must
be liquidated, the value unlocked through a liquidation would generally be directed to the
first priority creditors until their claim was satisfied. If there is any residual value remaining,
payments would then be made to the second priority creditors, then the third, etc., with
equity holders at the bottom of any such waterfall (and oftentimes receiving no value).
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Triple C-rated Corporate Bonds and Loans
A similar assessment takes place when an in-court balance sheet restructuring (as opposed
to a complete liquidation) takes place, as the U.S. bankruptcy code acknowledges a similar
priority waterfall. From an investor’s perspective, understanding the priority of payment
position of an investment (i.e., its position in the capital structure) is of critical importance
when assessing the risk associated with a potential loss of capital.
Exhibit 8: Recovery Rate by Position in Capital Structure, 1982-2014
100
Recovery (%)
80
60
40
20
0
1st Lien
Bank Loan
2nd Lien
Bank Loan
Senior
Secured
Bond
Senior
Senior
Subordinated
Junior
Unsecured Subordinated
Bond
Subordinated
Bond
Bond
Bond
Source: Moody’s Annual Default Study: Corporate Default and Recovery Rates, 1920-2014, March 4, 2015. Data
reflects annual results.
Past performance does not guarantee future results.
Exhibit 8 shows historical recovery rates for the different priority layers of bonds and loans
that have defaulted over the period from 1982 to 2014.14 Through this analysis, we can
observe a closer relationship between debt characteristics and losses from defaults for all
ratings classes, not just triple Cs.
Unlike the similar recovery rates observed among various ratings buckets in Exhibit 6, the
results vary dramatically depending on the layer in which an investment is made. To illustrate,
an investment in a 1st lien bank loan recovers, on average, over 60% of its value after a default,
while an investment in a subordinated bond recovers only about 25%. Consequently, to truly
assess the risk of a non-investment grade corporate debt instrument, an investor must not
only consider the fundamentals of the company, which the corporate rating generally reflects
reasonably well, but also the position of the debt instrument within the capital structure.15 As
we will discuss later, such position is not always easy to determine and may be affected by
terms and conditions that are only found deep inside a yellow-pages sized legal document.
Mining the Layers of a Capital Structure
For many short-term and/or liquidity-oriented investors, where buy or sell decisions may be
heavily influenced by volatile price swings, outright avoidance of triple Cs, which oftentimes
trade with far less liquidity than higher rated bonds, can make rational sense. But for long-term
Of course, not every capital structure will include every category of debt instrument set forth above—which may help explain, for example, why 2nd Lien Bank
Loans have not experienced as high a recovery rate as Senior Secured Bonds.
14
It may be, however, difficult to infer too much from Exhibit 8 without more data about the capital structure of any given issue included in such Exhibit (for
example, one would only expect a senior unsecured bond to fare similarly to a 2nd lien loan if there was limited debt ahead of that bond, and in any event the
recovery rate for an unsecured bond is likely to compare unfavorably with any secured loan within the same capital structure). As such, understanding the
specific composition of the corporate structure is necessary to fully appreciate and assess risk amongst different layers of potential investment opportunities.
15
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Triple C-rated Corporate Bonds and Loans
A major challenge
in finding the
investors less concerned with price volatility and the ability to liquidate at a moment’s notice,
there are attractive opportunities in select issues at the low end of the ratings ladder.
Standard deviation explains risk by measuring an investment’s volatility of returns, but if one
gold hidden in
is a long-term investor (i.e., one who seeks to hold to maturity/redemption), we argue that
the pyrite is to
According to Moody’s, “credit fundamentals speak mainly to probability of default rather than
correctly identify
analysis with commensurate legal and capital structure analysis, a prudent manager can
the true priority
the superior measure of risk involves the investment’s expected default and recovery rates.
loss-given-default” (default losses). It is our belief that by augmenting fundamental credit
identify triple C-rated bonds that offer a favorable risk-versus-return relationship.
As previously mentioned, one major challenge in finding the gold hidden in the pyrite
layer at which
is to correctly identify the true priority layer at which an investment is being made.
an investment is
terms and conditions of the obligation, as well as the rights of both the issuer and its
being made.
Corporate debt obligations are accompanied by legal documents that outline the specific
creditors. Furthermore, to the extent that a capital structure has more than one secured
debt tranche, an inter-creditor agreement will outline the many features of how the
creditors will interact under certain (typically adverse) scenarios. An understanding of
these contractual rights and remedies is therefore crucial in assessing a bond’s expected
recovery rate in the event of a default.
For example, while some layers are characterized as “senior secured”, the associated legal
documents may contain very wide allowances permitting the issuer to layer on more such
debt (or, in some cases, debt that is more senior in nature), an option that is not in the
investor’s control and which could ultimately dilute the value of that position in a downside
scenario. In this case, the “actual” priority layer may not be, in practicality, the one advertised.
Likewise, an unsecured layer may include legal provisions that prohibit any further debt
issuance above it, thus protecting the creditor class from potentially adverse action by the
issuer. The key takeaway is that an investor simply cannot read the cover page of a bond
indenture to know exactly where a debt class sits in terms of priority of payment. Investors
must dig into the often voluminous legal documentation to make an accurate assessment of
structural, or legal, risk.
Like a prospector patiently combing through piles of sand to find a pebble of gold, the
depth of an investor’s due diligence is essential since, as we have seen, the outcome of an
investment gone awry is heavily influenced by its actual position in the capital structure.
Conclusion
The analysis of legal documents associated with corporate debt issuance goes part and parcel
with fundamental credit analysis—and the Moody’s studies seem to support this view. In this
paper, we have demonstrated that triple Cs have historically offered higher returns than most
other corporate debt classes. At the same time, we have also seen that the risk profile of
triple Cs (using commonly accepted measures of risk) is so high that the risk-versus-reward
relationship of triple Cs appears to be patently unattractive, especially to an investor focused
on the short- and even medium-term. A closer examination of other factors, however, including
recovery rates over the longer term, as well as priority of payment, can make the case for a
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Triple C-rated Corporate Bonds and Loans
Examining
more nuanced view of triple Cs. In this respect, each credit must be analyzed in full in order
recovery rates
debt instrument sufficiently compensates one for the associated risks.
over the longer
Like many other investment options, it is only through a deep knowledge base and long
term, as well
nugget of triple C value as opposed to only a hunk of low-grade junk.
as priority of
Appendix
payment, can
make the case for
a more nuanced
view of triple Cs.
for an investor to properly evaluate whether the anticipated reward for investing in a triple C
experience of sifting through prospects that one can reliably and repeatedly identify a
BPS: Stands for basis points. A basis point is one one-hundredth of one percent (0.0001).
YTW (Yield to Worst Call): The lowest potential yield that can be received on a callable
bond without the issuer actually defaulting. For a callable bond, yield to call is determined by
calculating the yield to each potential redemption date and selecting the lowest result.
Spread: The yield of a bond minus the yield of the government bond that matches the maturity
(or appropriate call date) of the bond.
Coupon: The stated interest rate paid on a bond. Coupon payments for high yield bonds are
typically made semi-annually.
Duration: Duration is a measure of the sensitivity of a bond’s price to changes in interest rates.
Generally speaking, a bond with a duration of 2.0 is expected to move 2% higher (or lower) for a
100 basis point parallel shift down (or up) in the yield curve.
Over-the-Counter (OTC): Refers to the manner by which a debt instrument is traded. Trading
“over-the-counter” means that the debt instrument is traded via a dealer network rather than on
a formal exchange (such as the New York Stock Exchange).
Bid/Ask: Bid-ask spread is the difference between the highest price a buyer of a security will
pay, and the lowest price a seller is willing to offer. Usually, the more liquid an asset, the lower
the bid-ask spread.
Disclosures
Funds distributed by ALPS Distributors, Inc. DDJ Capital Management and ALPS Distributors,
Inc. are not affiliated.
The BofA Merrill Lynch Global High Yield Index tracks the performance of USD, CAD, GBP and EUR
denominated below investment grade corporate debt publicly issued in the major domestic or
eurobond markets. Qualifying securities must have a below investment grade rating (based on an
average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at
least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule
and a minimum amount outstanding of USD 100 million, EUR 100 million, GBP 50 million, or CAD
100 million. Original issue zero coupon bonds, eurodollar bonds, 144a securities (with and without
registration rights), and pay-in-kind securities (including toggle notes) are included in the index.
Callable perpetual securities are included provided they are at least one year from the first call
date. Fixed-to-floating rate securities are included provided they are callable within the fixed rate
period and are at least one year from the last call prior to the date the bond transitions from a fixed
to a floating rate security. Contingent capital securities (“cocos”) are excluded, but capital securities
where conversion can be mandated by a regulatory authority, but which have no specified
trigger, are included. Other hybrid capital securities, such as those legacy issues that potentially
convert into preference shares, those with both cumulative and non-cumulative coupon deferral
provisions, and those with alternative coupon satisfaction mechanisms, are also included in the
index. Securities issued or marketed primarily to retail investors, equity-linked securities, securities
in legal default, hybrid securitized corporates, taxable and tax-exempt US municipal securities
and DRD-eligible securities are excluded from the index. Index constituents are capitalizationweighted based on their current amount outstanding times the market price plus accrued interest.
Accrued interest is calculated assuming next-day settlement. Cash flows from bond payments that
are received during the month are retained in the index until the end of the month and then are
removed as part of the rebalancing. Cash does not earn any reinvestment income while it is held in
the index. Information concerning constituent bond prices, timing and conventions is provided in
the BofA Merrill Lynch Bond Index Guide, which can be accessed on Bloomberg (IND2[go], 4[go]),
or by sending a request to [email protected]. The index is rebalanced on the last calendar day of
the month, based on information available up to and including the third business day before the
last business day of the month. No changes are made to constituent holdings other than on month
end rebalancing dates. Inception date: December 31, 1997.
DDJ000102 7/14/2016
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Triple C-rated Corporate Bonds and Loans
MAY 2015
VOLUME 2 • ISSUE 2
Triple C-Rated Corporate
Bonds and Loans
Fool’s Gold or Buried Treasure?
ABOUT DDJ CAPITAL MANAGEMENT
DDJ Capital Management’s goal is to consistently produce attractive long-term investment
returns, while minimizing downside risk for our investors, which include:
> Corporate pension accounts and public retirement plans
> Endowments and foundations
> Insurance companies
> Other institutional clients
The underpinning of DDJ—a disciplined investment philosophy, coupled with a
commitment to exhaustive credit research—has remained constant since our founding
in 1996. Our highly skilled team is steadfast and focused on executing our strategy to
identify strong risk-adjusted investment opportunities in the leveraged credit markets.
For information on DDJ’s investment capabilities, please contact:
Jack O’Connor
Head of Business Development and Client Service
[email protected]
Phone 781.283.8500
Web
ddjcap.com
Jack O’Connor, head of business development and client service at DDJ, is a
representative of ALPS Distributors, Inc.
DDJ | CAPITAL MANAGEMENT
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