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A Pragmatist's Guide to Leveraged Finance: Credit Analysis for Bonds and Bank Debt
The First Practical Guide to Credit Analysis for Today’s $3,500,000,000,000+ High-Yield Leveraged Bond and Loan Markets
The high-yield, leveraged bond and loan market now exceeds $2.3 trillion in North America, €650 billion in Europe, and another $600 billion in emerging markets—and it’s growing fast. This market combines aspects of conventional fixed income markets, the event-driven volatility typically associated with equities, and structural features present nowhere else. To succeed in this market, you need credit analysis skills and insights specifically designed for it. Now, for the first time, there’s a complete practical guide to performing this analysis. Credit Suisse high-yield specialist Robert S. Kricheff focuses on how financial professionals actually prepare and use leveraged finance credit analysis, offering examples addressing diverse scenarios and a wide spectrum of credit risks, from companies near-investment-grade to firms in bankruptcy. He illuminates credit analysis as a dynamic process, shows how to evaluate both financial liquidity and asset protection, demonstrates how to use the field’s key tools, and explains how to apply the insights that make analysis an art, not just a science. • Projecting liquidity Will sufficient cash be generated to pay interest and principal? • Evaluating assets Can the investor be protected by the value of underlying assets? • Applying financial ratios and metrics How can credit quality be analyzed and investment options compared? • Evaluating management and ownership Can the company leaders deliver what they promise? • Investing on breaking news How can you profit from the junk bond market’s volatility?
The high-yield, leveraged bond and loan market now exceeds $2.3 trillion in North America, €650 billion in Europe, and another $600 billion in emerging markets—and it’s growing fast. This market combines aspects of conventional fixed income markets, the event-driven volatility typically associated with equities, and structural features present nowhere else. To succeed in this market, you need credit analysis skills and insights specifically designed for it. Now, for the first time, there’s a complete practical guide to performing this analysis. Credit Suisse high-yield specialist Robert S. Kricheff focuses on how financial professionals actually prepare and use leveraged finance credit analysis, offering examples addressing diverse scenarios and a wide spectrum of credit risks, from companies near-investment-grade to firms in bankruptcy. He illuminates credit analysis as a dynamic process, shows how to evaluate both financial liquidity and asset protection, demonstrates how to use the field’s key tools, and explains how to apply the insights that make analysis an art, not just a science. • Projecting liquidity Will sufficient cash be generated to pay interest and principal? • Evaluating assets Can the investor be protected by the value of underlying assets? • Applying financial ratios and metrics How can credit quality be analyzed and investment options compared? • Evaluating management and ownership Can the company leaders deliver what they promise? • Investing on breaking news How can you profit from the junk bond market’s volatility?
268 pages, Hardcover
First published February 1, 2012
45 people are currently reading
325 people want to read
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Displaying 1 - 7 of 7 reviews
May 25, 2020
Thought this was a good book to introduce leveraged finance concepts. Introduced the begning concepts along with more of the advanced concepts.
Below are my notes per chapter:
1. Introduction - Quick Intro on Book/Industry
Market has features of traditional investment grade income, but also has event driven volatility associated with equities
Few Companies of high-yield market are stagnant or stable
Credit Analysis focuses on two things:
Financial liquidity - cash to pay investors
Asset protection - asset value to repay debt if no cash
Volatility caused by companies in transition make analysis fun and frustrating and challenging
2. Common Leveraged Finance Terms - Industry Terms
Basic Terms:
Amortization - required debt paydown but also depletion of intangibles of assets on balance sheet
Corporate bank loan - loan to firm, legally not a security, but a financing + form of a term loan (not reborrowable) or a revolver (can be prepaid and reborrowed) + other terms include loan, bank debt, syndicated loan
Corporate bond - loan to firm in form of a security + also called debentures or notes
Covenants:
Affirmative covenants - something company must do (requirement to report financials, min cash flow)
Financial covenants/maintenance covenants - (mostly in bank debt) financial tests
Negative covenants - prevent or restrict what a company can do (requirement before a dividend is paid or more money is borrowed)
Default
Fails to make payment on time
Technical default - occurs when maintenance /affirmative covenant is violated
Pari Passu - two debts being ranked equally
Bonds and loans typically traded at $1,000 or $1,000,000 - why for institutional investors
Bank loans paid monthly and bonds semiannual
3. Defining the Market and the Ratings Agencies - Agency Info
Agencies to state their concerns in short term and long term but are often backwards looking
1000bp variance on bonds traded in single B rated area
Shows how little market value ratings
Many debt in below investment grade is not rated
4. The Participants - Info on players
Sell side - commercial and investment banks (both have IB services)
Advise on structure, size and covenants
For loans bank takes some of it on their books
For bonds, Bank needs to fully distribute bonds before they start market making
Buy Side - individual investors rarely invest in high yield corporate debt
They can put money in mutual funds that are dedicated to leverage debt markets
Hedge funds don't solely focus on HY focus more at distress for higher returns
CDOs/CLOs managers
PE - Pe sometimes buys back debt securities in public market if cheap
5. Why Is Leveraged Finance Analysis Unique? - Why Levfin
Combination of tools used in equity debt and corporate finance
Companies have more debt have less margin of error hence when news hit their price reacts more
Speculative nature makes you need to have an understanding of asset value of firm
Similar to equity valuation
M&A and asset sales are more common in levfin than investment grade hence similar to equity
Debt instruments -> look at ratios and Interest rate movements
Not in equity
Measure of value in Levfin ( spread and yield) are used in debt markets
But when get diresss you switch to return basis
Spend more time on cap structure because of debt load
Covenant analysis, structural rankings, and such are day to day, not fo investment grade
Also must know bankruptcy analysis if default
Some equity funds are dedicated to HY equities
Levfin more correlated to equity than fixed income markets (studies show)
6. The Major Components of Analysis - Outline of Credit Analysis
Liquidity and asset value (by sale of company or of certain assets) are two basic foundations
3rd part - structural issues
What's the ranking
What debt has what assets
Covenants
4th part - event scenarios
Upcoming events and impacts (use of decision trees)
5th important - relative value
Look at how risk fits with return
7. Some Features of Bank Loans - On bank debt
Called bank loans, syndicated loans, or loans
Not always held by banks (arranged by banks though)
Bought by buy side clients - no exchange though
Dividend into revolvers and term loans
Revolver
Unfunded amount pays .25% on undrawn amount
Full interest on drawn amount
Mostly done by commercial banks/investment because you need to have money aside for firms to draw down on (they supply liquidity)
Would need to hold money in reserve
Loans have floating rate or rate based on ratios
Sometimes have principal amortization (debt paydown)
Rare in bonds
Low graded loans may not have amortization
Loans require a cash flow sweep (not for bonds)
Term loans
Term loan A
Typically held by commercial banks
Have better terms - shorter maturity or more amortization
Term Loan B
Help by institutional investors
Rarely have meaningful amortization
Bank loans are callable anytime with a small premium while bonds want call protection to reap credit improvements
Bank loan repurchases need to be made pro rata across all tranches
Not for bonds
Bank debt may have first out tranches that get paid out ahead of others given an event
Bank loans >= to bonds
Bank debt has maintenance covenants while bonds don’t
Easier/more common to get amendments from loan holders than bondholders
Two ways to trade bank debt - assignment (transfers voting rights) and participation (doesn't)
8. A Primer on Prices, Yields, and Spreads
Bonds have different coupon terms and maturity dates - hence price does not tell much - look at yield or spread
Yield is rate of return of debt
Spread is rate of return compared to index Either libor or us treasuries)
Loans more spread of off libor and bonds more off of gov bonds
Better to look at spread than yields when comparing debt with different maturities - as yield is higher when maturity is higher
When a bond is callable - YTW (yield to worst) comes into play - rate if bond is called early
Bank loan coupons
Total return is like YTW but end price is not principal but what you get in bankruptcy
Deferred payment bonds (payment in kind)
Bonds at face value
Pay interest by issuing additional bonds at par instead of cash
Causes debt on balance sheet to increase
PIK has evolved to toggle bonds (PIK Toggle)
Company has option to to PIK or pay in cash
Zero coupon bonds start at a discount and increase as it get close to maturity
Called accretion
In bankruptcy - value is based on accretion not face value
Balance sheet holds value of debt
And accreted value is on interest expense on IS
Close to spread is tighter and far is “wide”
9. A Primer on Key Points of Financial Statement Analysis
Key things to look at in 10k:
Des of business
Mgmt discussion of recent results
Recent events
Liquidity section
Footnotes with debt structure
Key measures to look at:
FCF and EBITDA
Adj ebidta is big → Adds back non cash items like - noncash or stock compensation + noncash charges or write downs of asset values
Capex - Want to see how much is maintenance and how much is for long term projects
Interest expense - Some could be non cash due to deferred pay debt (PIK)
Taxes - Look at taxes vs actual cash taxes
Debt obligations
Cash and debt on balance sheet are key
Restricted cash is not counted in cash for liquidity
Capital leases should be similar to debt items
Cost of debt
Other liquidity source to service debt
Statement of cash flows it the most important as it shows were cash is going in and out
10. Credit Ratios
Cash obligations
EBITDA/interest + EBITDA-capex/interest
Also look at cash interest
Does not capture NWC etc so limited
Leverage ratio
Debt/EBITDA
EV multiple / debt/ebitda ratio gives u equity cushion
Also look at debt/equity and market adj debt/ebitda
Adj debt id not really realistic as most debt in rx is paid in full from top which is not what this debt shows - would only work for liens value covers
EV/ebitda method for valuation are shorthand for dcf which is the best way but quick
FCF ratios
fcf/debt = what % of debt can be paid down
If firm pays dividends may want to take it out but most leveraged companies don't pay dividends
One time charges are only good for if cash ratio analysis is for this year
See what the company does with cash flow over time (dividends, capex, debt repayment, acquisitions cash retention buybacks etc).
11. Business Trend Analysis and Operational Ratios
Look at revenue and ebita growth
Ebitda margins
Operating leverage - how rev growth turns to fcf - high fixed expenses that do not shift when sales go up → ebitda margin increases a lot when sales go up - hence operating leverage
Levfin does not really use ROIC ROE ROA
12. Expectations, Modeling, and Scenarios
Revenue model build is good
Helpful to try to break down fixed and variable costs but hard to do
Cogs moves with revenue and inflation
SGA with revenue
Capex off of revenue
See if it is similar to dep
If not may be due to M&A
Other sources of liquidity besides revolver = asset backed lines and vendor financing
13. Structural Issues: Coupons
Bank loans are floating and paid monthly
May have a LIBOR floor
Pricing grid - rate depends on financial metric
Bonds
Basic is fixed rate structure and paid semiannually
Rare but may have a floating rate with a floor
Four types of deferred pay bonds (pay no cash interest for all or part of bonds life) are (used when firm cannot afford all of the interest atm - higher risk higher yield):
Zero Coupon & Zero-step/zero-fix
Bond value rises = accretion as it gets closer to end date
Effect on statements
Balance sheet shows all bonds once issued (ex: new debt of value at discount)
Year later bond value would increase on balance sheet and difference is on income statement
And cash flow statement would show raise in non cash interest
Zero step is when interest rate steps up
Start at zero coupon and then pay cash interest
Typical structure: issue at discount, accrete for five years and then pay cash interest.
Rate it accreats is similar to cash payment
More rare is a cash opay step
Start with cash interest and it increases over time
Used for RX reogr stuff
PIK
Bonds issued at face amount - however for a time frame (3-5y) interest is not paid in cash but issued by additional bonds thus paying interest in kind rather than cash
Next payment is always larger with new bonds issued
Then pays cash interest
PIK toggle
For PIK period firm does not need to make PIK payments
May choose at interest period to pay the coupon with a PIK amount or cash payment or combination
Deferred pay bonds help preserve cah during transitional period
Rate/coupon is determined when bond is made
Factors affecting include country IR, bonds being issued, average HY rates, supply and demand, current debt
IR hedges - cost of 50-75 bps pon face value
Don’t really issue levfin debt for more than 10 years
HY debt is less correlated to IR changes than loans
14. Structural Issues: Maturities, Calls and Puts
Maturities
Bond = most common maturity is 10 years
7/8/12 year maturities are common but no set
Bank loans usually less than 10 years
Bonds usually mature at later date then loans
“Springing maturity” -if bonds mature before loans, it says that if bonds are not retired 6 months before it actually matures, and maturity of bank loan “springs forward” and becomes due immediately
Give senior guys more control
Levfin bonds usually don't require payment of principal before notes mature
Sinking fund = require to retire a small portion of bonds ahead of maturey
But not seen anymore
Bank loans have debt amortization / not in bonds market
Bonds usually .25% is require to be repaid on debt each quarter
Calls
Call gives company right to buyback notes or loan at specific price
Usually HY bond is not callable for first half and then once half coupon is paid it is
Bank loans do not have the same protection HY bonds do for calls
They can be called at anytime
Not have some minor protection for first two years
103 face value for year 1 and nothing after example
Call date affects rate of return
Some bonds are not callable at all = Noncall bonds or noncall for life
More common in IG market
If wanted to refinance firm would have to pay big premium to buy bonds back
Clawbacks
Fancy word for call option
If new money is raised in stock offering, firm can retire some of the bonds
Option only for first three years and have to pay a premium
Can't buy all the bond - only 35%
Idea is that raising equity is a credit improvement and something that bondholders would like - there for if company does this soon bondholders are willing to give the firm a call option
Somemoney will also have to be used to reduce bank debt
10% call
Right to call certain percentage of issue each year
Idea behind is bonds are callable anyway and it delivers the firm
Cash Flow Sweeps
Does not usually utilize entire portion of excess cash flow but usually 50%
For bonds it is more common to see debt holder has the option to sell the debt back to the company
Company has obligation to make a “mandatory offer to purchase”
AHYDO = Applicable HY discount obligation
It is a factor for most deferred pay HY instruments
????
Banks usually require mandatory prepayments upon some events
All or a portion of proceeds from asset sales
Also limitation on how much asset sale can be in cash
Min value threshold to trigger this
Mandatory payment for issue of equity and sometimes junior debt
Open market repurchases
Buy bonds on open market with cash
Has to be allowed in covenants
Can buy at any price set by seller
Can capture the discount if buys debt at discount
Books gain (noncash) on income statement
And reduced debt on balance sheet
Company cannot do discount buybacks of bank debt - firms are restricted
They have to pay down debt / cases in which waivers have been given
IF bonds at discount need to look at if firm will buy the m back = do NPV with premium on bonds
If bonds are not callable - company can tender for the bonds
Is an offer to repurchase bonds to holders
Even noncallable bonds have a provision that lets them call bonds at equivalent treasury note plus spread
15. Structural Issues: Ranking of Debt
Ranking
Bank loans have senior ranking and security (claim to asset)
Senior secured (has asset claim) = bank debt
Senior unsecured = bank loans sometimes but more often bonds - most common is HY bonds
Senior subordinated
Subordinated
Stock
Two most common ways to change ranking are through corporate structures and subsidiary guarantees
Structural subordination
If holding company owns operating company - operating company debt goes first
Hold co debt Is structurally subordinated to operating co debt
Covenants for operating company do not dictate what holding company does but operating company covenant usually dictate how cash and assets could move up to the holding company
Subsidiary guarantees
Guarantee from entity 1 on debt issued to entity 2 make debt of entity 2 an obligation for both entities
If opco guaranteed notes of holdco on a senior basis then holdco bonds would have priority claim on the assets ahead of sub
Below are my notes per chapter:
1. Introduction - Quick Intro on Book/Industry
Market has features of traditional investment grade income, but also has event driven volatility associated with equities
Few Companies of high-yield market are stagnant or stable
Credit Analysis focuses on two things:
Financial liquidity - cash to pay investors
Asset protection - asset value to repay debt if no cash
Volatility caused by companies in transition make analysis fun and frustrating and challenging
2. Common Leveraged Finance Terms - Industry Terms
Basic Terms:
Amortization - required debt paydown but also depletion of intangibles of assets on balance sheet
Corporate bank loan - loan to firm, legally not a security, but a financing + form of a term loan (not reborrowable) or a revolver (can be prepaid and reborrowed) + other terms include loan, bank debt, syndicated loan
Corporate bond - loan to firm in form of a security + also called debentures or notes
Covenants:
Affirmative covenants - something company must do (requirement to report financials, min cash flow)
Financial covenants/maintenance covenants - (mostly in bank debt) financial tests
Negative covenants - prevent or restrict what a company can do (requirement before a dividend is paid or more money is borrowed)
Default
Fails to make payment on time
Technical default - occurs when maintenance /affirmative covenant is violated
Pari Passu - two debts being ranked equally
Bonds and loans typically traded at $1,000 or $1,000,000 - why for institutional investors
Bank loans paid monthly and bonds semiannual
3. Defining the Market and the Ratings Agencies - Agency Info
Agencies to state their concerns in short term and long term but are often backwards looking
1000bp variance on bonds traded in single B rated area
Shows how little market value ratings
Many debt in below investment grade is not rated
4. The Participants - Info on players
Sell side - commercial and investment banks (both have IB services)
Advise on structure, size and covenants
For loans bank takes some of it on their books
For bonds, Bank needs to fully distribute bonds before they start market making
Buy Side - individual investors rarely invest in high yield corporate debt
They can put money in mutual funds that are dedicated to leverage debt markets
Hedge funds don't solely focus on HY focus more at distress for higher returns
CDOs/CLOs managers
PE - Pe sometimes buys back debt securities in public market if cheap
5. Why Is Leveraged Finance Analysis Unique? - Why Levfin
Combination of tools used in equity debt and corporate finance
Companies have more debt have less margin of error hence when news hit their price reacts more
Speculative nature makes you need to have an understanding of asset value of firm
Similar to equity valuation
M&A and asset sales are more common in levfin than investment grade hence similar to equity
Debt instruments -> look at ratios and Interest rate movements
Not in equity
Measure of value in Levfin ( spread and yield) are used in debt markets
But when get diresss you switch to return basis
Spend more time on cap structure because of debt load
Covenant analysis, structural rankings, and such are day to day, not fo investment grade
Also must know bankruptcy analysis if default
Some equity funds are dedicated to HY equities
Levfin more correlated to equity than fixed income markets (studies show)
6. The Major Components of Analysis - Outline of Credit Analysis
Liquidity and asset value (by sale of company or of certain assets) are two basic foundations
3rd part - structural issues
What's the ranking
What debt has what assets
Covenants
4th part - event scenarios
Upcoming events and impacts (use of decision trees)
5th important - relative value
Look at how risk fits with return
7. Some Features of Bank Loans - On bank debt
Called bank loans, syndicated loans, or loans
Not always held by banks (arranged by banks though)
Bought by buy side clients - no exchange though
Dividend into revolvers and term loans
Revolver
Unfunded amount pays .25% on undrawn amount
Full interest on drawn amount
Mostly done by commercial banks/investment because you need to have money aside for firms to draw down on (they supply liquidity)
Would need to hold money in reserve
Loans have floating rate or rate based on ratios
Sometimes have principal amortization (debt paydown)
Rare in bonds
Low graded loans may not have amortization
Loans require a cash flow sweep (not for bonds)
Term loans
Term loan A
Typically held by commercial banks
Have better terms - shorter maturity or more amortization
Term Loan B
Help by institutional investors
Rarely have meaningful amortization
Bank loans are callable anytime with a small premium while bonds want call protection to reap credit improvements
Bank loan repurchases need to be made pro rata across all tranches
Not for bonds
Bank debt may have first out tranches that get paid out ahead of others given an event
Bank loans >= to bonds
Bank debt has maintenance covenants while bonds don’t
Easier/more common to get amendments from loan holders than bondholders
Two ways to trade bank debt - assignment (transfers voting rights) and participation (doesn't)
8. A Primer on Prices, Yields, and Spreads
Bonds have different coupon terms and maturity dates - hence price does not tell much - look at yield or spread
Yield is rate of return of debt
Spread is rate of return compared to index Either libor or us treasuries)
Loans more spread of off libor and bonds more off of gov bonds
Better to look at spread than yields when comparing debt with different maturities - as yield is higher when maturity is higher
When a bond is callable - YTW (yield to worst) comes into play - rate if bond is called early
Bank loan coupons
Total return is like YTW but end price is not principal but what you get in bankruptcy
Deferred payment bonds (payment in kind)
Bonds at face value
Pay interest by issuing additional bonds at par instead of cash
Causes debt on balance sheet to increase
PIK has evolved to toggle bonds (PIK Toggle)
Company has option to to PIK or pay in cash
Zero coupon bonds start at a discount and increase as it get close to maturity
Called accretion
In bankruptcy - value is based on accretion not face value
Balance sheet holds value of debt
And accreted value is on interest expense on IS
Close to spread is tighter and far is “wide”
9. A Primer on Key Points of Financial Statement Analysis
Key things to look at in 10k:
Des of business
Mgmt discussion of recent results
Recent events
Liquidity section
Footnotes with debt structure
Key measures to look at:
FCF and EBITDA
Adj ebidta is big → Adds back non cash items like - noncash or stock compensation + noncash charges or write downs of asset values
Capex - Want to see how much is maintenance and how much is for long term projects
Interest expense - Some could be non cash due to deferred pay debt (PIK)
Taxes - Look at taxes vs actual cash taxes
Debt obligations
Cash and debt on balance sheet are key
Restricted cash is not counted in cash for liquidity
Capital leases should be similar to debt items
Cost of debt
Other liquidity source to service debt
Statement of cash flows it the most important as it shows were cash is going in and out
10. Credit Ratios
Cash obligations
EBITDA/interest + EBITDA-capex/interest
Also look at cash interest
Does not capture NWC etc so limited
Leverage ratio
Debt/EBITDA
EV multiple / debt/ebitda ratio gives u equity cushion
Also look at debt/equity and market adj debt/ebitda
Adj debt id not really realistic as most debt in rx is paid in full from top which is not what this debt shows - would only work for liens value covers
EV/ebitda method for valuation are shorthand for dcf which is the best way but quick
FCF ratios
fcf/debt = what % of debt can be paid down
If firm pays dividends may want to take it out but most leveraged companies don't pay dividends
One time charges are only good for if cash ratio analysis is for this year
See what the company does with cash flow over time (dividends, capex, debt repayment, acquisitions cash retention buybacks etc).
11. Business Trend Analysis and Operational Ratios
Look at revenue and ebita growth
Ebitda margins
Operating leverage - how rev growth turns to fcf - high fixed expenses that do not shift when sales go up → ebitda margin increases a lot when sales go up - hence operating leverage
Levfin does not really use ROIC ROE ROA
12. Expectations, Modeling, and Scenarios
Revenue model build is good
Helpful to try to break down fixed and variable costs but hard to do
Cogs moves with revenue and inflation
SGA with revenue
Capex off of revenue
See if it is similar to dep
If not may be due to M&A
Other sources of liquidity besides revolver = asset backed lines and vendor financing
13. Structural Issues: Coupons
Bank loans are floating and paid monthly
May have a LIBOR floor
Pricing grid - rate depends on financial metric
Bonds
Basic is fixed rate structure and paid semiannually
Rare but may have a floating rate with a floor
Four types of deferred pay bonds (pay no cash interest for all or part of bonds life) are (used when firm cannot afford all of the interest atm - higher risk higher yield):
Zero Coupon & Zero-step/zero-fix
Bond value rises = accretion as it gets closer to end date
Effect on statements
Balance sheet shows all bonds once issued (ex: new debt of value at discount)
Year later bond value would increase on balance sheet and difference is on income statement
And cash flow statement would show raise in non cash interest
Zero step is when interest rate steps up
Start at zero coupon and then pay cash interest
Typical structure: issue at discount, accrete for five years and then pay cash interest.
Rate it accreats is similar to cash payment
More rare is a cash opay step
Start with cash interest and it increases over time
Used for RX reogr stuff
PIK
Bonds issued at face amount - however for a time frame (3-5y) interest is not paid in cash but issued by additional bonds thus paying interest in kind rather than cash
Next payment is always larger with new bonds issued
Then pays cash interest
PIK toggle
For PIK period firm does not need to make PIK payments
May choose at interest period to pay the coupon with a PIK amount or cash payment or combination
Deferred pay bonds help preserve cah during transitional period
Rate/coupon is determined when bond is made
Factors affecting include country IR, bonds being issued, average HY rates, supply and demand, current debt
IR hedges - cost of 50-75 bps pon face value
Don’t really issue levfin debt for more than 10 years
HY debt is less correlated to IR changes than loans
14. Structural Issues: Maturities, Calls and Puts
Maturities
Bond = most common maturity is 10 years
7/8/12 year maturities are common but no set
Bank loans usually less than 10 years
Bonds usually mature at later date then loans
“Springing maturity” -if bonds mature before loans, it says that if bonds are not retired 6 months before it actually matures, and maturity of bank loan “springs forward” and becomes due immediately
Give senior guys more control
Levfin bonds usually don't require payment of principal before notes mature
Sinking fund = require to retire a small portion of bonds ahead of maturey
But not seen anymore
Bank loans have debt amortization / not in bonds market
Bonds usually .25% is require to be repaid on debt each quarter
Calls
Call gives company right to buyback notes or loan at specific price
Usually HY bond is not callable for first half and then once half coupon is paid it is
Bank loans do not have the same protection HY bonds do for calls
They can be called at anytime
Not have some minor protection for first two years
103 face value for year 1 and nothing after example
Call date affects rate of return
Some bonds are not callable at all = Noncall bonds or noncall for life
More common in IG market
If wanted to refinance firm would have to pay big premium to buy bonds back
Clawbacks
Fancy word for call option
If new money is raised in stock offering, firm can retire some of the bonds
Option only for first three years and have to pay a premium
Can't buy all the bond - only 35%
Idea is that raising equity is a credit improvement and something that bondholders would like - there for if company does this soon bondholders are willing to give the firm a call option
Somemoney will also have to be used to reduce bank debt
10% call
Right to call certain percentage of issue each year
Idea behind is bonds are callable anyway and it delivers the firm
Cash Flow Sweeps
Does not usually utilize entire portion of excess cash flow but usually 50%
For bonds it is more common to see debt holder has the option to sell the debt back to the company
Company has obligation to make a “mandatory offer to purchase”
AHYDO = Applicable HY discount obligation
It is a factor for most deferred pay HY instruments
????
Banks usually require mandatory prepayments upon some events
All or a portion of proceeds from asset sales
Also limitation on how much asset sale can be in cash
Min value threshold to trigger this
Mandatory payment for issue of equity and sometimes junior debt
Open market repurchases
Buy bonds on open market with cash
Has to be allowed in covenants
Can buy at any price set by seller
Can capture the discount if buys debt at discount
Books gain (noncash) on income statement
And reduced debt on balance sheet
Company cannot do discount buybacks of bank debt - firms are restricted
They have to pay down debt / cases in which waivers have been given
IF bonds at discount need to look at if firm will buy the m back = do NPV with premium on bonds
If bonds are not callable - company can tender for the bonds
Is an offer to repurchase bonds to holders
Even noncallable bonds have a provision that lets them call bonds at equivalent treasury note plus spread
15. Structural Issues: Ranking of Debt
Ranking
Bank loans have senior ranking and security (claim to asset)
Senior secured (has asset claim) = bank debt
Senior unsecured = bank loans sometimes but more often bonds - most common is HY bonds
Senior subordinated
Subordinated
Stock
Two most common ways to change ranking are through corporate structures and subsidiary guarantees
Structural subordination
If holding company owns operating company - operating company debt goes first
Hold co debt Is structurally subordinated to operating co debt
Covenants for operating company do not dictate what holding company does but operating company covenant usually dictate how cash and assets could move up to the holding company
Subsidiary guarantees
Guarantee from entity 1 on debt issued to entity 2 make debt of entity 2 an obligation for both entities
If opco guaranteed notes of holdco on a senior basis then holdco bonds would have priority claim on the assets ahead of sub
April 8, 2013
This is an incredible book and should be the official guide for any professional working in the Leveraged Finance / High Yield space. Robert Kricheff, a Managing Director at Credit Suisse who ran Leveraged Finance Strategy and Portfolio Analytics is the author of the book and he wrote this in 2012 so is very up to date. This is not a theory book / straight quantitative / or historical book which you typically find with books on this subject, but it is written in a way from the leveraged finance banker’s perspective. The book is extremely focused and speaks on all of the concepts / terminology / analysis that comes across our role and discusses the meaning and how to view them in depth. Although a lot of this book was review for me, many of the things I understood 75% prior to reading the book, but now I can say I understand these concepts 95% well. There is even a little quiz at the end of each chapter to make sure you are understanding the concepts correctly. You will have an extremely sound understanding of the leveraged finance field after reading this book and also how to finance companies as there is also a significant amount of time talking about different capital structure solutions etc. Again, this is an absolutely must read for people working in the industry as the material it covers are the things that we should all know 100% cold and I cannot think of any better book that I have come across that goes into such great depth but is so focused on relevant items that come across our job on a day to day basis. You will become not only a better banker after reading this, but also a better investor and you will understand structuring / credit / financing well after reading this book.
February 9, 2024
A good intro read and the section on covenants was probably the most helpful.
March 16, 2025
Surprisingly easy to read and of-course wide ranging. I enjoyed the author's occasional quips of sarcasm that made it feel a bit more like I was having a conversation with a real live human. I would definitely recommend this as an extensive primer on HY debt, I learnt a lot.
August 20, 2017
Good overview of Leverage Finance Market
I feel like a piece have a better understanding of the market, definitely will read again. Great book to keep as a reference guide
I feel like a piece have a better understanding of the market, definitely will read again. Great book to keep as a reference guide
December 27, 2022
Great for developing a foundational knowledge of LevFin.
August 2, 2021
First textbook-like reading I've done in some time. Mr. Kricheff did a fantastic job avoiding the pitfalls of many academic writings by keeping it just to the pragmatic tips for the business. For those starting out in Leveraged Finance I can't recommend it enough. For those in other fields...you can probably skip it.
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