High Yield Bonds

2019 ◽  
pp. 599-620
Author(s):  
Byron C. Barnes ◽  
Tony Calenda ◽  
Elvis Rodriguez
Keyword(s):  
Interest Rates ◽  
Economic Activity ◽  
Default Risk ◽  
Credit Default Swap ◽  
High Yield ◽  
Credit Default ◽  
Key Drivers ◽  
Default Swap ◽  
Investment Grade ◽  
Credit Event

High yield bonds (HYBs) have become an integral part of the funding and investment landscape. HYBs are bonds rated below investment grade, indicating a potentially greater default risk and concomitant return. Although often associated with leveraged buyouts (LBOs), corporations also use HYBs to finance general corporate needs. The key drivers of HYB issuance include general economic activity, the number and size of transactions requiring financing, interest rates, and the availability of substitute financial products such as leveraged loans. Leveraged loans are another source of financing for issuers with a similar profile as HYB issuers. A key difference between HYBs and leveraged loans is that the covenants associated with a leveraged loan are typically more lender friendly. Similar to investment grade bonds, investors can purchase insurance to hedge a long HYB position against a credit event by using a credit default swap.

The Information in Credit Default Swap Volume

2016 ◽  
Vol 24 (3) ◽  
pp. 479-504
Author(s):  
Dongyoup Lee
Keyword(s):  
Stock Prices ◽  
Credit Default Swap ◽  
Current Increase ◽  
Market Participants ◽  
Credit Default ◽  
Natural Measure ◽  
Outstanding Debt ◽  
Default Swap ◽  
Investment Grade ◽  
Credit Event

This article examines the informational content of credit default swap (CDS) net notional for future stock and CDS prices. Using the information on CDS contracts registered in DTCC, a clearinghouse, I construct CDS-to-debt ratios from net notional, that is, the sum of net positive positions of all market participants, and total outstanding debt issued by the reference entity. Unlike the ratio using the sum of all outstanding CDS contracts, this ratio directly indicates how much of debt is insured with CDS and therefore, is a natural measure of investors’ concern on a credit event of the reference entity. Empirically, I find crosssectional evidence that the current increase in CDS-to-debt ratios can predict a decrease in stock prices and an increase in CDS premia of the reference firms in the next week. Greater predictability for firms with investment grade credit ratings or low CDS-to-debt ratios suggests that investors pay more attention to firms in good credit conditions than those regarded as junk or already insured considerably with CDS.

How to estimate expected credit losses – ECL – for provisioning under IFRS 9

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mariya Gubareva
Keyword(s):  
Risk Premium ◽  
Default Risk ◽  
Financial Regulation ◽  
Credit Default Swap ◽  
High Yield ◽  
Expected Loss ◽  
Content Type ◽  
Term Structures ◽  
Ifrs 9 ◽  
Investment Grade

PurposeThis paper provides an objective approach based on available market information capable of reducing subjectivity, inherently present in the process of expected loss provisioning under the IFRS 9.Design/methodology/approachThis paper develops the two-step methodology. Calibrating the Credit Default Swap (CDS)-implied default probabilities to the through-the-cycle default frequencies provides average weights of default component in the spread for each forward term. Then, the impairment provisions are calculated for a sample of investment grade and high yield obligors by distilling their pure default-risk term-structures from the respective term-structures of spreads. This research demonstrates how to estimate credit impairment allowances compliant with IFRS 9 framework.FindingsThis study finds that for both investment grade and high yield exposures, the weights of default component in the credit spreads always remain inferior to 33%. The research's outcomes contrast with several previous results stating that the default risk premium accounts at least for 40% of CDS spreads. The proposed methodology is applied to calculate IFRS 9 compliant provisions for a sample of investment grade and high yield obligors.Research limitations/implicationsMany issuers are not covered by individual Bloomberg valuation curves. However, the way to overcome this limitation is proposed.Practical implicationsThe proposed approach offers a clue for a better alignment of accounting practices, financial regulation and credit risk management, using expected loss metrics across diverse silos inside organizations. It encourages adopting the proposed methodology, illustrating its application to a set of bond exposures.Originality/valueNo previous research addresses impairment provisioning employing Bloomberg valuation curves. The study fills this gap.

scholarly journals The Determinants of Credit Default Swap Premia

2009 ◽  
Vol 44 (1) ◽  
pp. 109-132 ◽  
Author(s):  
Jan Ericsson ◽  
Kris Jacobs ◽  
Rodolfo Oviedo
Keyword(s):  
Default Risk ◽  
Common Factor ◽  
Explanatory Power ◽  
Empirical Work ◽  
Credit Default Swap ◽  
Principal Component ◽  
Corporate Bond ◽  
Credit Default ◽  
Default Swap ◽  
Swap Spreads

AbstractVariables that in theory determine credit spreads have limited explanatory power in existing empirical work on corporate bond data. We investigate the linear relationship between theoretical determinants of default risk and default swap spreads. We find that estimated coefficients for a minimal set of theoretical determinants of default risk are consistent with theory and are significant statistically and economically. Volatility and leverage have substantial explanatory power in univariate and multivariate regressions. A principal component analysis of residuals and spreads indicates limited evidence for a residual common factor, confirming that the theoretical variables explain a significant amount of the variation in the data.

US energy high-yield bonds spur default risk

2015 ◽  
Keyword(s):  
Interest Rates ◽  
Default Risk ◽  
Oil Price ◽  
High Yield ◽  
Content Type ◽  
The Past ◽  
The Us ◽  
Low Interest Rates ◽  
Investment Grade ◽  
Energy Companies

Subject Impact of the oil price drop on energy high-yield bonds. Significance The over 50% oil price drop since June 2014 is hitting bonds issued by energy companies, particularly those issued by sub-investment grade corporates. The US high-yield bond market has been growing rapidly over the past five years. The shale boom has generated considerable investment, mainly funded through the issuance of these bonds which benefit from historically low interest rates. As the oil price has plunged, the spread over Treasury yields paid by the average issuer in the energy subsector has more than doubled between July and the December 2014 peak. Impacts Yields currently offered by the energy subsector are not far from pricing in a default scenario. Persistently low oil prices will further darken the outlook for the energy subsector and the high-yield market generally. A possible default cycle in the energy sector could accelerate outflows, overstretching the sector further.

scholarly journals The Impact of Earnings on the Pricing of Credit Default Swaps

2009 ◽  
Vol 84 (5) ◽  
pp. 1363-1394 ◽  
Author(s):  
Jeffrey L. Callen ◽  
Joshua Livnat ◽  
Dan Segal
Keyword(s):  
Default Risk ◽  
Credit Default Swap ◽  
Credit Default Swaps ◽  
Cash Flows ◽  
Earnings Surprises ◽  
Credit Default ◽  
Percent Increase ◽  
Default Swap ◽  
Highly Correlated ◽  
The Impact

ABSTRACT: This study evaluates the impact of earnings on credit risk in the Credit Default Swap (CDS) market using levels, changes, and event study analyses. We find that earnings (cash flows, accruals) of reference firms are negatively and significantly correlated with the level of CDS premia, consistent with earnings (cash flows, accruals) conveying information about default risk. Based on the changes analysis, a 1 percent increase in ROA decreases CDS rates significantly by about 5 percent. We also find that (1) CDS premia are more highly correlated with below-median earnings than with above-median earnings and (2) CDS premia are more highly correlated with earnings of low-rated firms than with earnings of high-rated firms. Evidence indicates further that short-window earnings surprises are negatively and significantly correlated with CDS premia changes in the three-day window surrounding the preliminary earnings announcement, although the impact is concentrated in the shorter maturities.

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