1. COREY BRAMLET HIGH YIELD BONDS (JUNK BONDS) AND THEIR HISTORY

2. HIGH YIELD BONDS A bond that is rated below investment grade Non-Investment Grade Speculative Grade “Junk” Lower-rated bonds involve more risk, and therefore offer higher yields The U.S. junk bond default rate 2010 – 13-14% The U.S. junk bond default rate 2007 – less than 1%

3. RATINGS JUNK

4. TERMINOLOGY Original-Issue High Yield Bonds A bond rated non-investment grade at time of issuance Fallen Angles Rated investment grade and has “fallen” to non-investment grade Rising Stars Non-investment grade and has “risen” to investment grade

5. BUYOUTS Leveraged Buyout (LBO) The assets of the acquired company are used as collateral for the borrowed capital Ironically a company’s success can be used against itself as collateral Management Buyout (MBO) A buyout led by existing management

6. LBO/MBO - PROS AND CONS Pros: Improve market value and increase efficiency Increased personal stake gives managers and employees incentive to succeed Cons: High financial pressure - Increased risk of default MBO gives existing management the incentive to devalue their stock ???

7. ROLE OF HIGH YIELD BONDS Shift risk from commercial banks to the public investing market Opportunity for a corporate segment to access a larger pool of funds Market sets the interest rates

8. WHO CAN’T PLAY? Commercial Banks Insurance Companies Pension Funds Prohibited in their bi-laws from investing in bonds below a particular level

9. DREXEL BURNHAM LAMBERT Michael Milken “The Junk Bond King” Realized fallen angels had regularly been valued less than what they were worth Money raising ability facilitated the activities of leveraged buyouts (1980’s Boom) "There is no shortage of capital; there is only a shortage of management talent“ Indicted on 98 counts of racketeering and securities fraud in 1989 Milken pleaded guilty to six counts of securities and tax violations in 1990

10. MICHAEL MILKEN (CONTINUED) 1993 – Milken diagnosed with prostate cancer Today- Founded Milken Family Foundation to support medical research and education Founded the Prostate Cancer Foundation

11. REFERENCES http://www.reuters.com/article/2010/03/04/defaults-bonds-moodys- idUSN0412669120100304 http://www.reuters.com/article/2010/03/04/defaults-bonds-moodys- idUSN0412669120100304 http://en.wikipedia.org/wiki/High-yield_debt http://www.moodys.com/ http://en.wikipedia.org/wiki/Michael_Milken http://money.cnn.com/2007/12/06/markets/junk_bonds/index.htm Brealey, Myers, Allen. Principles of Corporate Finance 10 th Edition, 2010 Fabozzi, Modigliani, Jones. Foundations of Financial markets and Institution 4 th Edition, 2010

12. QUESTIONS ?