Defaults high-yield bonds

EXHIBIT 28.9 Vintage Distribution of Defaulted High-Yield Bonds Excluding Fallen Angel United States 2001... 

Like Black and Cox s work, the authors find spreads similar to the market spreads. Moreover, they find a correlation between credit spread and interest rate. In fact, they illustrate that firms with similar default risk can have a different credit spread according to the industry. The evidence is that a different correlation between industry and economic environment affects the yield spread on corporate bonds. Then, the duration of a corporate bond changes following its credit risk. For high-yield bonds, the interest-rate sensitivity increases as the time to maturity decreases. 

Some practitioners argue that Merton models are more appropriate than reduced form models when pricing default swaps on high-yield bonds, due to the higher correlation of high-yield bonds with the underlying equity of the issuer firm. 

In 2001, Fitch Ratings launched a default index dedicated to the emerging European high-yield bond market. The index is a par based index and was created using the same methodology Fitch employs for its US high-yield default series (see Exhibit 28.2). In particular, in order to... 

Fitch used the market prices of defaulted bonds one month after default as a proxy for recovery value. The growth of a secondary market for European high-yield bonds made this analysis possible but ultimately the various bankruptcy jurisdictions in Europe will determine how bondholders will fare. The outcome of these filings will be very meaningful for the development of the market going forward because each country has its own bankruptcy laws and not all are favorable to bondholders. Some jurisdictions, such as France for example, strongly... 

Given this new landscape, in 2001, Fitch Ratings created a par based default index specific to the European high-yield market. The objective of this chapter is to compare and contrast default and recovery patterns across the two markets in order to give global bond investors and European investors, in particular, historical and current benchmarks for measuring credit risk. 

Excludes fallen angel defaults. Based on bond prices one month following default. Prices provided by High-Yield Advantage. 

The research compares the model spread to the one observed in the market. In order to determine the term structure of credit spread. Eons uses historical probabilities by Moody s database, adopting a recovery rate of 48.38%. The empirical evidence is that bonds with high investment grade have an upward credit spread curve. Therefore, the spread between defaultable and default-free bonds increases as maturity increases. Conversely, speculative-grade bonds have a negative or flat credit yield curve (Figure 8.7). 

Some issuers are more creditworthy than others. When a bond issue s price is high and the yield is low, it usually means that the company or municipality has no risk of default. U.S. Treasury securities are priced very high and have a low yield precisely because of the reputation of their issuer the U.S. government. 

As shown in the output, this particular NBO search terminated successfully after only a single cycle, which satisfied the default search criteria. The search yielded a Lewis structure with one core (CR), one bond (BD), and three lone pair (LP) Lewis-type (L) NBOs, which described about 99.95% of the total electron density (i.e., 9.995 of the 10 electrons). These five L-type NBOs easily satisfied the default threshold (1.90e) for pair occupancy [the 0 under Low occ (L) ] and the remaining 17 non-Lewis (NL) NBOs were all well below the O.le occupancy threshold [ High occ (NL) ] to be considered a satisfactory Lewis structure. [The Dev entry refers to deviations from the initial guess that steers multiple cycles of the search algorithm (if required), beyond the scope of this book consult the NBO... 

---