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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26837
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| Title: | Market Size, Investment Performance, and Expected New Supply of
Defaulted Bonds & Bank Loans: 1987-1999 |
| Authors: | Altman, Edward I.
Masset, Pierre |
| Issue Date: | Jan-2000 |
| Series/Report no.: | FIN-99-004 |
| Abstract: | This report presents results and discussion of the investment
performance of those bonds and bank loans that have defaulted on their
scheduled payments to creditors and continue trading while the issuing
firm attempts a financial reorganization. Monthly total return measures
are compiled based on the Altman-NYU Salomon Center Indexes of Defaulted
Bonds and Defaulted Banks Loans, as well as an index that combines bonds
and loans. These returns are compared to the total returns of common
stocks and high yield corporate bonds. Returns are based on our
market-weighted indexes and presented for the past year (1999), as well
as for the last 13 years (for bonds) and four years for bank loans. We
also estimate the expected supply of new defaulted debt in the United
States for the coming three years. Nineteen ninety-nine was a mixed year
for investors in distressed debt securities. Although the Defaulted
Public Bond Index increased by a respectable 11.34% in 1999, the
positive rate of increase was mainly a function of the excellent
performance over a threemonth period in the earlier part of the year
(February, March and April) when the size of the index was comprised of
a relatively small number of securities and when the movement of a few
issues had a significant influence on the Index. Still, the positive
annual performance reversed the negative annual returns that we had
observed in the prior two years. On a comparative note, our Defaulted
Public Bond Index’s return of 11.34% was slightly higher than
Salomon Smith Barney’s Bankrupt Bond Index return of 8.42%.
Defaulted bank loans did not fare as well, recording a slight increase
for the year of 0.65%. Except for the initial year (1996) of our Bank
Loan Index, performance has been lackluster in the past three years.
Finally, the Combined Public Bond and Private Bank Loan Index recorded a
positive annual return in 1999 of 4.45%, resulting in a basically flat
performance over the four years of the combined index calculation
period. Comparative returns for the thirteen-year period (1987-1999),
show that common stocks strengthened its number one asset class
return/risk position. High yield bonds, while performing relatively
poorly in 1999 (+1.7%), maintained a slight average annual return
advantage over defaulted bonds. The two “bright” or positive
factors related to the defaulted bond and bank loan markets in 1999 were
the enormous increase in the supply of new defaulted issues and the
record low average market value to face value ratio of the Index at the
end of the year. The size of the Index more than doubled in number of
issues and tripled in face and market values over the past twelve months
as the default amount of high yield bonds reached a record high level in
1999 and the default rate went from 1.6% to over 4.0% (see our companion
report on Defaults and Returns in the High Yield Bond Market). Based on
our forecast of future defaults, we expect the number and amounts of the
issues in both the Bond and Bank Loan indexes to continue to grow,
albeit at a lower rate, in the next three years. Going forward, we
suggest that this increased supply, and the relatively low marketto-face
value ratio of defaulted bonds at the end of 1999, may present
significant investment opportunities. |
| URI: | http://hdl.handle.net/2451/26837 |
| Appears in Collections: | Finance Working Papers
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