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High yield bond Sang Hai
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Outline Introduction History Issuers Investors Structure Q&A
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Introduction High risk – High reward
Junk Bond, speculative grade bond. High risk – High reward
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Introduction Bank loans Financing options High interest rates
Short/Intermediate – term loans Application denied Financing options Long-term debt Fixed interest rates Varying payment structures
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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
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History – Michael Milken
“junk bond king” Drexel Burnham Started a high-yield bond trading department – 100% ROI
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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 bonds MCI vs AT&T, Texas Air(Texas International Airline)
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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
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Current U.S. Treasury market $10 trillion
High yield bond $7.8 trillion Municipal bond $3.7 trillion
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Issuers Fallen Angel, LBO, Start ups
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Investors Insurance companies Mutual funds Pension funds
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Structure Payment-In-Kind (PIK) Deferred-Interest Split Coupon
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Reference http://www.econlib.org/library/Enc/JunkBonds.html
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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
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