for everyone else?
There is surprisingly little literature on the high yield market despite its market size and importance to the economy. In the early 1990s, several books on high yield were released that provided information on junk bonds but the market was very different then. It was one one-tenth its current size with less complexity and it did not include a large, traded leveraged loan market as it does today. Recent books on high yield are more specialized and written for the analyst seeking job skills or the fund manager contemplating more advanced topics related to risk management. What is missing is a book for everyone else – which actually encompasses most market participants.
Within the high yield industry, comparatively few people partake at the level of making buy-sell decisions on individual debt instruments. This is because high yield bonds and loans are difficult to transact in small quantities. Most wealth allocators are engaged at a level where they are deciding whether to buy into a high yield fund and, if so, which one? Other professionals, like market analysts and bankers, provide services related to the industry and are seeking a better understanding of the bigger picture. Participants like private equity firms, lawyers, and issuers need to know the financial and legal terms of high yield debt. Business school students and analysts in training programs can gain an advantage with interviews and a head start on the job with a more informed perspective of high yield capital markets and investment banking.
My goal in writing High Yield Debt: An Insider's Guide to the Marketplace is to explain the U.S. corporate high yield market in basic terms and as concisely as possible. This book will address how the market has evolved, who buys and issues high yield, high yield debt structures, asset class performance, and how to track and evaluate the market for investment opportunities in a variety of different funds. In writing this book, I make no assumptions about the audience's knowledge level; I assume that most industry jargon is confusing and requires explanation and I get into a fairly deep level of insight and analysis such that even experienced market professionals will find something new and interesting. I also seek to explain the most frequently asked questions I've received on high yield. Last, I include what I consider the most important historical market data so that this book can be referred back to over time on any areas of interest.
This book can be read either cover to cover, or consulted when topics of interest surface. The Contents outlines the book's progression. It lists key topics of common interest for easy reference. Many of these topics are questions I have been asked during investor meetings. Any potentially confusing terms are italicized and included in the Glossary. Each chapter contains an introduction and summary with key insights, which is relevant to subsequent chapters. While this can be kept as a reference book, I recommend at least skimming chapter summaries from start to finish to gain a better sense of the book's contents.
Chapter 1 starts with an introduction to high yield, beginning with a basic definition of high yield debt and progressing to how the high yield industry evolved from a market for fallen angles to a thriving $2.5 trillion industry. Chapter 2 delves into the issuers of high yield – explaining why they raise high yield debt, the decisions they face, and the capital-raising process with investment banks. Chapter 3 then addresses buying high yield, and provides insight on important differences in the buyer base and financing for high yield bonds and leveraged loans. I also address the implications of high yield being an over-the-counter market and trends with liquidity, a common concern. Chapter 4 addresses financial concepts and economic terms important to understanding high yield debt, which is vital to assessing and tracking the market.
Chapters 5 and 6 round out the foundational knowledge required to form a view on high investment opportunities. Chapter 5 addresses high yield debt structures and how these differ for high yield bonds and leveraged loans. Understanding what constitutes aggressive versus less aggressive debt structures also provides a means to track developing trends in the marketplace. Chapter 6 provides an overview of high yield credit agreements, a more technical topic, and also discusses other legal considerations such as recent regulatory developments, which are topics particularly important to credit investors, high yield issuers, and corporate lawyers. The purpose of Chapter 6 is to explain what protections exist in high yield credit agreements and clarify the meanings of certain industry jargon that is often used but frequently misunderstood.
After establishing a framework for understanding the high yield industry and the differences between its two key market segments – high yield bonds and leveraged loans – Chapter 7 gets into a topic of great interest: asset class performance. Chapter 7 addresses many frequently asked questions on high yield performance such as total returns, volatility, interest rate risk, defaults, and recovery. Building on this foundation, Chapter 8 provides a few tools and metrics that can be used to assess the market opportunity at a given time. This evaluation method includes incorporating a view of corporate spreads with industry fundamentals to provide a sense of the risk-reward for both leveraged loans and bonds. I also provide a list of the information sources used by high yield investors to make more informed decisions. Armed with this knowledge, the reader is better able to form and express a view on the various investment options, which for most investors are funds rather than individual debt instruments.
Chapter 9 describes the different “public” or 1940 Act funds that provide high yield exposure such as mutual funds, closed-end funds, ETFs, and BDCs. The different 1940 Act Funds have pros and cons which also vary depending on the type of exposure sought. I explain the primary considerations related to each of these fund options and discuss their performance over different periods of time. Chapter 10 addresses “private” or alternative funds that provide high yield exposure such as mezzanine funds, credit hedge funds, and distressed funds. Private funds are generally only available to larger investors that meet certain income and net worth requirements. These types of funds have higher fee structures but can outperform in certain market environments primarily through the use of fund leverage, active investment strategies, and greater portfolio concentration. Understanding the conditions under which these funds can thrive can be helpful when choosing which one to pursue.
I am grateful for your interest in this book and would welcome any questions or comments you have. Please feel to reach me at [email protected] or visit the website www.hydebt.com for more information.
The concepts and ideas in this book are my own and other professionals may disagree with my conclusions. There are risks involved with investing, including the possible loss of capital. Investors should consider the investment objectives, risks, charges, and expenses of the fund(s) carefully before investing. Please seek the counsel of your accountant for any tax-related matters as there is no tax guidance presented in this book.
Acknowledgments
Although this book lists me as the author, it was shaped by the contributions of many friends and colleagues. First, I would like to thank Sean O'Keefe, my research assistant. Sean scrutinized every draft, created insightful charts and analyses, and tracked down permissions. I couldn't imagine finishing this book without his tremendous effort. I would also like to thank all my colleagues at Wasserstein & Co., who have been generous with their time. Ellis Jones, Chairman of Wasserstein & Co., is one of the kindest and most thoughtful investors I've met in my career. Ellis offered several insights based on his experience that helped improve the book's contents. My team at Wasserstein Debt Opportunities, especially Alex Kelsey and Beth Gardiner, also reviewed and helped improve drafts. I am grateful for their support.
Over the years, I've worked with some bright professionals who took an interest in my growth. At Goldman Sachs, Melina Higgins was a mentor and gave me numerous opportunities to learn about high yield. At Apollo Management, my friend and colleague Bruce Spector taught me about restructurings while working together on difficult situations. I feel lucky to have had such good teachers including my cousin Anup Bagaria and my friend and legal advisor Emil Buchman. Anup, a Co-Managing Partner of Wasserstein & Co., has been my biggest supporter and played a role in almost every step of
