High Yield Issuers

Question 1

Does the debt of smaller issuers typically hit the secondary market?

Answer 1

No.

Question 2

What are the implications of smaller issuer’s debt not hitting the secondary market, from the perspective of the buyer?

Answer 2

Must be willing to hold the bond until maturity as it cannot be sold.

Question 3

What is the illiquidity premium?

Answer 3

Premium on a bond which cannot trade on the secondary market to account for illiquidity risk or the inability to sell holdings in the secondary market without a substantial loss in value.

Question 4

Debt for larger offerings is usually _________.

Answer 4

Liquid.

Liquidity is an important consideration for certain investment funds like mutual funds and exchange traded funds (ETFs) that must be able to satisfy redemptions on a daily basis.

Question 5

What is required by BoA Merrill Lynch to be in the High Yield Index?

Answer 5

issue must have at least one year to maturity and $150 million or more of par value outstanding.

Question 6

What is the definition of enterprise value?

Answer 6

An enterprise value is the sum of all debt and equity in the capital structure, less balance sheet cash.

Question 7

What is the typical capital structure for an LBO?

Answer 7

In a leveraged buyout (LBO), for example, a cap- ital structure will often consist of 70% debt and 30% equity.

Question 8

A low-cost capital structure mostly consists of ________.

(Debt, Equity, Cash)

Answer 8

Debt

Question 9

What is the downside of a capital structure with a lot of debt?

Answer 9

Business can go into bankruptcy if it can’t meet its debt obligations.

Question 10

Which is the ranking for these sources of financing?

1. High Yield Debt
2. Leveraged Loans
3. Equity

Answer 10

1. Leveraged Loans
2. High Yield Debt
3. Equity

Question 11

What are some the difference between a bond and leveraged loans?

Answer 11

1. Bonds are most often fixed-rate obligations, paying interest at a set rate for the term of the debt, and are generally long-term obligations with less flexibility for early repayment.
2. Leveraged loans are commonly floating-rate liabilities, paying interest at a spread to LIBOR. The interest rate on loans resets periodically, often monthly or quarterly and thereby provides protection to investors from rising interest rates.
3. loans generally have shorter term maturities and fewer or no penalties for early repayment. Loans also come with more restrictive terms than bonds to lessen risk.

Question 12

Which industries are the most prolific users of high yield debt?

Answer 12

media and telecom

Question 13

Why do creditors lend to companies like Verizon or Netflix?

Answer 13

Creditors lend to these companies because they have recurring and predictable cash flow streams built on subscriptions and tangible and intellectual property that can be pledged as collateral and sold in downside scenarios

Question 14

Why do oil and gas companies use high yield debt?

Answer 14

The market is cyclical so the high yield debt insulates them from the cyclicality of the business.

Question 15

What are the four common uses of high yield debt?

Answer 15

1. M&A
2. Leveraged Recapitalizations
3. Project Financing
4. Refinancing

Question 16

What is leveraged recapitalization?

Answer 16

When a company raises funds to give money back to its owners.

Question 17

What does it mean when an investment bank provides an underwritten offering?

Answer 17

Group of investment banks commit to raise the financing or act as a lender of last resort. This type of commitment provides the most certainty and is most often sought by issuers.

Question 18

Summarize who high yield issuers are and why they acquire high yield debt?

Answer 18

High yield issuers are well-established companies spanning a broad range of industries and include many household names. These issuers tap the high yield market for high yield bonds and/or leveraged loans to finance mergers and acquisitions, leveraged recapitalization and project financ- ings.