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Corporate Bonds

6 important questions on Corporate Bonds

What about the corporate trustee?

The promises of corporate bond issuers and the rights of investors who buy them are set forth in great detail in contracts generally called INDENTURES. Usually a corporate trustee acts in the fiduciary capacity for investors, paid by the issuer. He should also assess compliance to covenants. If breached the trustee can declare a default. Obliged for issues above 5 mio. But trustee not obliged to analyse by itself, it can rely on issuer.

What about event risk?

Certain event that may influence the debt quality ratings; decapitalizations, restructurings, recapitalizations, mergers, acquisitions, leveraged buyouts, share repurchases. These events can lead to substantial changes in a corporation's capital structure. Basically enrich shareholders in favor of bondholders.

Headline risk: uncertainty due to media coverage (alter their perception of firm's prospects).

Poison puts, thwart unfriendly takeover by repaying debt. Not deter, but make it more expensive. Maintain net worth covenant.

What about high-yield bonds?

Below investment-grade bonds (junks). But note: not all are at the verge of bankruptcy. Could be on the fringe to investment-grade. Who are they?
- Original issuers: venture-capital or emerging market companies (story bond), also called businessman's risk (edge of BBB and BB)
- Fallen Angels: have come on hard times with deteriorating balance sheet and income statement financial parameters.
- Restructurings and leveraged buyouts: debt burden with a view to maximize shareholder value. Usually done with bridge financing.

WHat about default rates?

Typically recovery is more important. Default rate is the NUMBER of issuers that default divided by the total number of issuers at the beginning of the year. Normally not dollar driven as credit decision does not increase with the size of the issuer.
Default (Moody's): any missed or delayed disbursement of interest and/or principal.

What about recovery rates?

Default loss rate usually looked at, default times no recovery. Usually recovery on bonds is about 38%.

What about MTNs (Medium term notes)?

Not about medium maturity, can be 100 years. Differ primarily in how they are cols to investors. Sort shelf-registration that the issuer can continue to issue whenever it needs the cash.

Structured notes: cross-selling. Mostly by options, swaps forwards...