I’m pretty sure that High Yield means that the companies have non-investment grade credit and therefore pay more interest (or have higher discounts). As I understand, distressed usually means that the companies are not only having credit rating problems, but may actually be in default. The trick there is that the prices don’t reflect necessary increased risk premia for payments, but rather bets that they will pay off par value at all. So with a high yield bond, I’m probably expecting to get par at the end for most of the bonds, but for distressed, I may be buying at 20c on the dollar and expecting I’ll actually get 30c on the dollar by the end of the process.
tvPM Wrote: ------------------------------------------------------- > naturallight did a nice job. > > HY is below investment grade corporate debt (say > what you will about ratings accuracy), but its > making debt payments as scheduled. There is risk > that they may default on the payment, which is why > they yield so much. > > Distressed is not making proper payments. Whether > defaulted, bankruptcy, tripped a covenant, etc > that obviously pushes the price down as well. > Typically require a lot more work than just buying > the asset and receiving the payment, there is a > workout process with the company in many cases, > etc. > > I am not sure exactly what world you live in but I > hope that helps. I have seen bonds that have met all covenants but still labeled as distressed…
in fact, in bloomberg type DIS and that shows you all distressed debt. many of which are not defaulted either technically or payment
looks like Bloomberg defines distressed as securites with spreads >1000. which in my book is HY., that’s my world
hey maybe you have and thats cool, my point is popular definition seems to be that they are not exactly the same thing. Sure there may be blurs of semantics or whatever, but it should be widely accepted that they are not the same vehicle. I would also be upset if I saw my company debt listed as distressed when there has been no rationale to label it as such, especially in recent years when almost anything was AAA.
convertarb-nice note on the definition, thats good to know for future
ConvertArb Wrote: ------------------------------------------------------- > looks like Bloomberg defines distressed as > securites with spreads >1000. which in my book is > HY., that’s my world I’ve heard this before too, I think academics use this as a rule of thumb for identifying defaulted bonds during normal times. But I think it’s just a shortcut, not an actual definition.
naturallight Wrote: ------------------------------------------------------- > I think with DD, you are dealing with bonds that > have actually defaulted. So the yields would be > extremely high as the debt is selling for > something like 20 cents on the dollar. And there’s > the legal aspect of the bankruptcy process you > have to deal with, in addition to the financial > analysis. I work in Commercial Real Estate DD, which is notably different than what, say Cerberus does; however, a lot of the ideas are the same. Essentially, yields get thrown out the window because you know the par value of the loan will not be paid back. What your shooting for is a way to buy the collateral (whether it’s the assets of GM, an income producing property or a pool of credit card recievables) for a substantial discount to what you believe is their true value. Types of things you look at are current returns, how long it will take and how costly it will be to take the collateral, and the costs/benefits of owning the collateral once you take it.
I believe that throughout finance (on Earth, not sure where ConvertArb hails from), “HY” = below-investment-grade (rated Ba1/BB+ or lower) The majority of issuers (in the US and globally) are HY. Also universally, “distressed” = low price. (A typical threshold is 80.) Most HY issuers’ bonds are not distressed. It’s not hard to come up with examples of, say, high-yield issues trading at a premium. Ways this could happen: + a HY issuer improves (say from B- to BB+) + credit spreads or RFR have declined since original issuance
Prior to the credit cluster f*ck, desks I dealt with defined distressed as sub 80, +1000 or more, or single C or worse rated (ie more likely than not to miss a payment of some form). Now, with this mess we are in, sub 80 is normal (ML Master II index well below that in px), so is +1000 or wider (plenty of crossovers yield that much). So, those are out the window. Tough to compare rules of thumb (rules of thumb are aplenty, actual rules? not so much) between when HY was trading at +300 OAS and now. 18 mos ago +1000 would make you shudder when the index was +300, so that might work, but not now. That same bond is now +2500 at least. But, I agree, most HY co’s arent distressed. A Ba1/BB+ name wouldnt be traded by the distressed guys. But at the end of the day, there is no such thing as a rule on this. Its all in the eye of the beholder… i guess, on the flipside, you could say that the whole market is distressed when its trading here. Its just symantics.
i think a high yield ETF will allow to capture much of what you want to… merrill’s yield index recently had spread of over 20%. i guess one problem these days is that so many high yield deals are covenant-lite with alot of bank debt ahead of the high yield debt.
grover - Good post, but just like we capitalize the Great Depression, proper English say that you need to capitalize the Credit Cluster F*ck. To add to this, in hedge funds distressed usually is a broader range of securities including all kinds of claims in bankruptcy court, leases, bank debt, credit facilities, bonding facilities (like for construction), etc. not just bonds.