Original Issue High Yield Bonds: Aging Analyses of Defaults, Exchanges, and Calls

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. Wiley and American Finance Association are collaborating with JSTOR to digitize, preserve and extend access ABSTRACT This paper presents an aging analysis of 741 high yield bonds and finds default, exchange, and call percentages substantially higher than reported in earlier studies. By December 31, 1988, cumulative defaults are 34 percent for bonds issued in 1977 and 1978 and range from 19 to 27 percent for issue years 1979-1983 and from 3 to 9 percent for issue years [1984][1985][1986]. Exchanges are also a significant factor although they often are followed by default. Moreover, a significant percentage of high yield debt, 26-47 percent for 1977-1982, has been called. By December 31, 1988, approximately one third of the bonds issued in 1977-1982 has defaulted or been exchanged, and an additional one third had been called. On average, only 28 percent of these issues are still outstanding. There is no evidence that early results for more recent issue years differ markedly from issue years 1977 to 1982.THE DEVELOPMENT OF THE original issue high yield bond market represents one of the most successful innovations in recent financial history.1 From its inception, a major impetus behind the growth of the new issue high yield bond market has been the argument that risk-adjusted returns are high. Specifically, it is argued that defaults on high yield bonds, while higher than those on investment grade bonds, are low relative to their coupon rate, i.e., that their higher coupon rates more than compensate for the default risk. This apparent market inefficiency has been attributed to outdated conventions used by rating agencies and bond investors, both of whom supposedly fail to see the true risk/return characteristics of high yield bonds. the referee for this journal, as well as the participants at the University of Chicago and Harvard University Finance Seminars, for their comments. Finally, special thanks are due to Bruce MacLennan for his research assistance. 1 The growth in this market can be viewed as a process of securitization. Low rated firms previously borrowed from insurance companies and banks. Development of the public high yield market allowed the securitization of these private placements. 923 This content downloaded from 128.235.251.160 on Sun, 14 Dec 2014 11:19:05 AM All use subject to JSTOR Terms and Conditions 924The Journal of Finance Attempts to verify empirically the risk/return characteristics of the original issue high yield debt market are difficult because of data limitations. Since 1977 marks the beginning of the original issue high yield debt market,2 there is only a limited history of its performance through time and none through a full range of economic and ca...

Defaults of Original Issue High‐Yield Convertible Bonds

“…This laborious process is necessary because of the lack of a centralized market and of information sources. To check for similarity of results, we compare our summary statistics for rated nonconvertible securities to those of Asquith, Mullins and Wolff (1989) and obtain similar results 3…”

“…However, these studies understate default rates because of the rapid increase in the par value of outstanding issues and because cumulative default rates increase with years from issuance. Two recent studies by Altman (1989) and Asquith, Mullins, and Wolff (1989) have corrected these problems by using aging analysis to follow rated nonconvertible high‐yield bonds over time; they find cumulative default rates for such bonds 10 years after issuance exceeding 30 percent.…”

Applying Bankruptcy Prediction Models to Distressed High Yield Bond Issues

“…For example, Altman [1989] and Asquith, Mullins, and Wolff [1989] have found that the longer a high-yield bond is outstanding, the greater the likelihood of default. Lehman and Fridson [1995] have determined that high-yield debt with high coupon payments is more likely to default than similarly rated low-coupon debt.…”

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“…In millions of dollars. Source for totals: Asquith, Mullins, and Wolff (1989). Source for M&A related: Wigmore (1990).…”