The Investment Performance of Defaulted Bonds for 1987-95 and Market Outlook

Abstract

This report presents a discussion of the investment performance of those bonds that have defaulted and continue trading in the public market while the issuing firm attempts a financial reorganization. Monthly total returns measures are compiled based on the Altman-NYU Salomon Center Index of Defaulted Debt Securities and compared with the total returns of common stocks and high yield bonds. Returns based on our market weighted index are presented for the past year, 1995, as well as the nine year period 1987-1995. 1995 was a modest year of performance for defaulted bonds especially when compared to our two other risky indexes and to risk free government bonds. The return performance of our three indexes for the nine year sample period shows that common stocks are now the number one performer with defaulted bonds in second place followed by high yield bonds. All three asset classes have done quite well in the last decade. Diversification and seasonal movements are also analyzed in this report. Finally, current and future supply estimates for the defaulted and distressed market are presented.