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Triple C-Rated Corporate Bonds and LoansFool’s Gold or Buried Treasure?

May 2015VOLUME 2 • IssUE 2

scott M. Mcadam, CFaPortfolio Specialist

Mr. McAdam joined DDJ as head trader in 2006 and joined the Business

Development and Client Service team in 2011. He is a member of the Investment

Review Committee and works to communicate DDJ’s investment philosophy and

strategies with clients, consultants and prospects.

> Acreditratingcapturesonlyapartoftheriskprofileofa

corporatedebtinstrument.

> Whereaninvestmentismadeinacorporatecapital

structureisamajorconsideration,butthetruepositionof

aninvestmentisnotalwayseasytoidentify.

> Augmentingfundamentalanalysiswithlegaland

structuralanalysisiskeytoidentifyingattractive

opportunitiesandtrulyunderstandingtherisk/reward

componentsofaninvestment.

TrIpLE C-raTEd COrpOraTE BOnds and LOans

ddJ | CapITaL ManaGEMEnT 2

Executive Summary

Imagine strolling along a little-known, wooded trail. As you pass by a brook, a shiny, sparkling

object gleams at you from beneath the surface. In fact, you see many of them dotting the

sandy bed of the brook. Who wouldn’t be excited by the prospect of discovering a field of

gold nuggets? All of those little glittering bits must be the real thing, right?

Unfortunately, you probably would be experiencing the same misperception that duped

thousands of 19th century prospectors and miners. To the untrained eye, the mineral iron

pyrite, commonly known as “fool’s gold”, appears to represent great value and riches to

those who find and capture it. But, in fact, this shiny imposter offers very little in the way

of reward for someone who makes the effort of wading around in the cold, rapidly moving

water to pick up these near-worthless rocks.

However, all hopes of gilded riches may not be lost. Sometimes iron pyrite is found in close

proximity to small amounts of gold. Consequently, astute prospectors may be able to discover

that beneath the first layer of the brook’s bed lies little pockets of value, the harvesting of

which may yield a good return for their efforts, providing of course, that they can discern the

difference between an ordinary mineral and a much more valuable chemical element.

In our view, the prospector’s task is similar to active investing in non-investment grade

(also known as “high yield”) bonds and loans, particularly those corporate debt instruments

that carry a “triple C” rating.1 This paper will further explore the potential rewards and

accompanying pitfalls associated with investing in such space.

High Yield Bond Ratings: Three Main “Buckets”The non-investment grade corporate bond and loan markets comprise issuers that have been

assigned a rating of “double B” or below. Exhibit 1 shows the non-investment grade ratings

systems used by the two most popular credit ratings agencies: Moody’s Investors Service

(“Moody’s”) and Standard & Poor’s Financial Services (“S&P”).2

Exhibit 1: Non-Investment Grade U.S. Corporate Debt Ratings

Category Moody’s S&P

“Double B” Ba1

Ba2

Ba3

BB+

BB

BB-

“Single B” B1

B2

B3

B+

B

B-

“Triple C” Caa1

Caa2

Caa3

CCC+

CCC

CCC-

Source: Moody’s, S&P.

1 Moody’s Investors Service and Standard and Poor’s Financial Services use a different nomenclature for their ratings system. For example, the Moody’s equivalent to a S&P rating of CCC+ is Caa1. For purposes of this paper, we shall refer to both such ratings as “Triple Cs”. For information on the rating agencies’ methodology go to: https://www.moodys.com or www.standardandpoors.com.

2 An easy way to remember each agency’s nomenclature is to think of S&P as S+P since it uses the + and – signs, while Moody’s uses the lower case letter “a” and numbers.

Category Moody’s S&P

Other Ca

C

CC

C

Defaulted D D



Exhibit 2 shows select characteristics of each ratings category of the BofA Merrill Lynch

Global High Yield Index (Developed Markets).3

Exhibit 2: High Yield Bond Market Characteristics, March 31, 2015

High Yield Market4 Double Bs Single Bs Triple Cs

Number of Bond Issuers 1,295 437 648 353

Market Value ($Bn) $1,717 $863 $639 $214

Average Yield (worst call) 5.74% 4.16% 6.23% 10.69%

Average Spread vs. Treasuries

462 bps 305 bps 509 bps 957 bps

Average Years to Maturity 6.27 6.67 6.05 5.35

Average Coupon 6.63% 5.76% 7.05% 8.49%

Average Duration 4.24 4.73 3.94 3.16

Source: BofA Merrill Lynch HY Credit Chartbook.See Appendix for definitions.

The largest ratings bucket within the high yield universe consists of double B bonds, which

accounts for approximately half of the entire high yield bond market as measured by

market value. Single Bs are second at 37%, with triple Cs representing only around 12% of

outstanding high yield bonds.

Each category has distinct features that, in general, tend to influence how the bonds perform

during certain market conditions. For example, since investors generally view double B-rated

issuers as being of higher credit quality than the other ratings categories, double B issuers are

able to issue bonds with longer maturities and lower coupons than the other categories. Such

bonds have a high sensitivity to changes in Treasury rates (as reflected by the higher duration).

Consequently, during time periods of dramatic Treasury rate declines,5 double B bond

returns usually benefit to a greater extent as a result of such declining rates than single B

and triple C bonds.

Conversely, triple C bonds generally have shorter maturities and higher coupons (i.e., lower

duration) and, therefore, experience less sensitivity to Treasury rate moves, a characteristic

that can be particularly attractive to investors during periods of rising rates. However, triple

C bonds have earned their low rating due to increased susceptibility to adverse business

events, driven either by macroeconomic or company-specific factors, that may derail an

issuer from making its promised interest and principal payments.

Triple Cs Under the Microscope

According to Moody’s,6 a triple C rating is assigned when an issuing company’s debt is consid-

ered to be “speculative”, “of poor standing” and “subject to very high credit risk” in regard to

the “likelihood of default as well as any financial loss suffered in the event of a default” over the

3 We are using high yield bond data as a proxy for the entire leveraged credit market (high yield bonds and loans).4 Includes developed markets. 5 Declining interest rates have, essentially, been the trend over the past 34 years, but probably not so going forward.6 For simplicity, we focus only on Moody’s ratings.



medium term. Moody’s ratings are meant to address two distinct concerns: a) the probability

that an issuer will default,7 and b) how much capital may be lost should a default occur.

Typically, the credit ratings agencies assign ratings upon the issuance of a new bond or loan.

Ratings are then reviewed periodically (the depth of such reviews, however, is arguable). Over

time, ratings can be upgraded or downgraded, depending on the operating performance of

the issuer.

The Sparkling Returns of Triple CsThe chart below displays return data for investment grade (“IG”) and high yield bonds since

1999, including the returns of each ratings class.

Exhibit 3: Annualized Returns (%) of U.S. IG & High Yield Bonds by Ratings Class (January 1, 1999–March 31, 2015)

Source: BofA Merrill Lynch HY Credit Chartbook. past performance does not guarantee future results.

Over the past 16-plus years, triple C issuers generated the highest total return of all the U.S.

investment grade and non-investment grade ratings buckets. Although the high historical

returns generated by triple C bonds shine brightly to investors, we believe that the glitter is

mostly fool’s gold. While treasure is often present among the mineral scrap heap, unearthing

actual gold-laden issuers lying within it takes special knowledge, experience and hard work.

Risk-Adjusting Triple C Returns Reveals Their True ChemistryIt is no secret that high returns attract investors and that the triple C segment of the market

is the most subject to momentum trading during times of market exuberance (greed) and

depression (fear).8 What is often forgotten by those who chase returns and yield, however,

is the second pillar of prudent investing, namely the amount of risk that must be borne to

achieve a certain return.9

— 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00

CCCs

Bs

BBs

BBBs

As

AAs

AAAs

US HY

US IG

0.00 0.05 0.10 0.15 0.20 0.25

CCCs

Bs

BBs

BBBs

As

AAs

AAAs

US HY

US IG

Sharpe Ratio

Annualized Return (%)

7 A “default” is defined by Moody’s as the failure to promptly pay interest or principal when due, but can also include a bankruptcy filing or a distressed exchange. Typically a company that defaults on an interest payment on a bond has 30 days to cure such default, after which time creditors can elect to pursue remedies, including forcing the issuer into bankruptcy.

8 Triple C bond sensitivity to market fluctuations is reflected in its beta of 1.44x versus the BofA Merrill Lynch U.S. High Yield index for the past five years.9 With the third pillar being the correlation of returns to other assets/positions.

While the high

historical returns

generated by

triple C bonds

shine brightly

to investors, we

believe that the

glitter is mostly

fool’s gold.



The most common definition of investment risk, according to Modern Portfolio Theory (MPT),

is the standard deviation of the returns generated by an investment, which is a measure of

the volatility of those returns. According to MPT, the higher the volatility (standard deviation)

of the returns of an investment, the riskier the investment, and vice versa. Using standard

deviation, investors can compare the return to the risk of an asset, a relationship that is

captured in the Sharpe Ratio.10

Exhibit 4 displays Sharpe Ratios for the ratings categories of corporate bonds that were

presented in Exhibit 3. Here, the magnetism of triple Cs is quite different. When considering

the amount of risk, investing in triple Cs appears to be folly when compared to investments

in the other ratings buckets and the investment grade and non-investment grade markets

as a whole. Based solely on this analysis, triple Cs appear to represent the corporate debt

version of iron pyrite.

Exhibit 4: Sharpe Ratios of U.S. IG & High Yield Bonds by Ratings Class (January 1, 1999–March 31, 2015)

Source: BofA Merrill Lynch HY Credit Chartbook.past performance does not guarantee future results.

However, just as there is sometimes actual gold below a level of worthless iron pyrite, there

can be strong risk-adjusted returns generated by investing in triple Cs, as long as the investor

has the requisite knowledge and expertise needed to uncover such nuggets of value. Again,

such knowledge and expertise is not common and requires years of experience to develop. It

involves not only the ability to derive a reliable estimate of the enterprise value of a corporate

entity, but also, equally as important, a profound understanding of the legal and structural

elements of the corporation’s debt instruments.

Employing standard deviation and the Sharpe ratio is a common and reasonably effective

method to measure the investment risk of an asset and compare it to another potential

investment. However, relying solely on such statistical measurements does not provide an

investor a full appreciation of risk, particularly the distinct risk of a debt obligation that is

traded over-the-counter as opposed to a stock traded on an exchange.

— 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00

CCCs

Bs

BBs

BBBs

As

AAs

AAAs

US HY

US IG

0.00 0.05 0.10 0.15 0.20 0.25

CCCs

Bs

BBs

BBBs

As

AAs

AAAs

US HY

US IG

Sharpe Ratio

Annualized Return (%)

10 The Sharpe Ratio equals the excess return of an investment over the risk-free rate (typically 3-month Treasury bills) divided by the standard deviation of the investment’s returns.



Many stocks trade often (i.e., are liquid), which can provide real-time investor information and

sentiment on the risk of investing in that stock. Bonds and loans are typically far less liquid,

with some issues, particularly triple Cs, trading infrequently and through a limited number of

market makers. Moreover, when triple Cs do trade, there are often wide price variations that

have less to do with the relative attractiveness of the issue and more with the result of the

impact of bid/ask spreads and trading illiquidity. Consequently, standard deviation-based

metrics, which may be exacerbated by such trading inefficiencies, reveal only a part of the

risk makeup of an investment.

Next, we discuss other methods of risk assessment that can be used to augment standard

deviation and the Sharpe ratio.

Default & Recovery RatesMoody’s uses the risk-laden language detailed earlier when describing triple Cs for good

reason—triple C bonds and loans default at a much higher rate than similar investments in

the other ratings categories. The table below shows default rates by non-investment grade

ratings categories, using both the original rating when the debt was first issued and the

rating assigned 12 months before the default occurred.

Exhibit 5: Average Default Rates by Ratings Category, 1995-2014

Default Rate Double B Single B Triple C

Using Rating at Time of Issuance 1.2% 3.2% 6.0%

Using Rating 12 Months Before Default 0.9% 2.7% 5.8%

Source: JP Morgan “Default Monitor,” March 31, 2015. Data reflects the 20-year average as of December 31, 2014. past performance does not guarantee future results.

On average, triple C debt instruments defaulted almost twice as frequently as single Bs and

about five times more than double Bs. The clear implication from these historical results

is that bonds rated triple C have a higher probability of defaulting than bonds in the other

ratings buckets. But, as we observed in Exhibit 3, even with more frequently occurring

defaults, triple Cs still produced higher returns than each of the other ratings buckets.

Ostensibly, investors are aware of the increased standard deviation and default risk of

triple Cs but nonetheless continue to purchase such bonds. One reason for this seemingly

contradictory behavior is the possibility that like standard deviation, the actual default rate

only explains part of the risk framework associated with investing in triple Cs.

Losses from DefaultsIn most cases, a company defaulting on its debt obligation(s) portends capital losses, but

sometimes the actual losses are either relatively small, or, if the position is held over a long

enough period of time, partially or wholly offset by the instrument’s coupon payments received

prior to the eventual default. In some cases, a handsome profit may even be generated by a

defaulted triple C. In fact, even though a company can have a high probability of default, the

actions a company takes following its default are critical in determining whether an investment

will eventually be deemed successful or unsuccessful. For example, will the issuer’s management

team reduce headcount, seek further equity investment, or perhaps discontinue certain

operations? Such decisions can significantly affect the ultimate fate of a defaulted investment.

Default rates

explain only

part of the risk

framework

associated with

investing in

triple Cs.



Given the historical data, triple Cs clearly have a higher probability of default. But when

we analyze the final value that an investor eventually recovers (known as the recovery rate,

or the percentage of the initial investment recovered) from defaulted triple C investments

compared with other ratings categories, we observe a surprising outcome: there is little

difference in recovery rates between the three main ratings buckets.11

Exhibit 6: Recovery Rates and Moody’s Corporate Ratings, 1987-200612

Source: Moody’s Special Comment: Moody’s Ultimate Recovery Database, April 2007. Data reflects annual results. past performance does not guarantee future results.

Exhibit 6 shows recovery rates of defaulted bonds and loans broken down by all non-

investment grade ratings categories for the period of 1987 to 2006.13 Interestingly, two of the

three triple C-rated debt categories (specifically, the relatively higher quality Caa1 and Caa2

issues) recovered nearly as much, or more, than the three double B-rated debt categories

(Ba1, Ba2, and Ba3). Furthermore, recovery rates on all triple C debt categories compared

reasonably well to the single B categories (B1, B2, and B3). Based on these results, we can see

that historically, default losses suffered from investing in triple Cs are not much different than

losses suffered from other below investment grade ratings categories.

Given the similarity of recovery rates across the ratings buckets, it can be concluded that

even though Moody’s’ initial ratings are generally good at reflecting overall credit quality

(and hence, the probability of default), the ratings may not be as effective a predictive

indicator of actual losses that may be realized after a default occurs, particularly for a

long-term investor. In their defense, Moody’s ratings ultimately do a good job highlighting

the incremental risk of capital loss but mostly because its fundamental credit analysis

helps the agency assess reasonably well the probability of default amongst the various

ratings categories.

Per

cen

t

0

20

40

60

80

100

Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C

11 According to Moody’s, “three alternative methods are used to derive nominal valuations on these obligors’ debts at the time of resolution” with the “method Moody’s considers to be the most representative of the actual recovery” used for this analysis.

12 Rating at time of issuance.13 The study began following the introduction of Moody’s loss-given-default (LGD) assessments. Unfortunately, a more recent study including data updated to

the present is not available at the time of publication of this paper. However, the author believes that the time period used is representative of recovery rates that may be expected over more recent time periods.



To illustrate, combining the 6.0% triple C default rate with the 57% recovery rate (conversely,

a 43% capital loss) for Caa1 issues results in an ultimate default loss of roughly $2.60 for

every $100 invested in Caa1 issues. As expected by their higher rating, for double Bs, the

default loss is markedly lower, as the default rate of only 1.2% combined with a 52% recovery

(48% capital loss) for Ba2 issues leads to only $0.57 of default losses per every $100 invested.

Default losses, however, fail to tell the whole story when assessing the risk of investing in triple

Cs, because again, even when actual losses are factored in, their returns are still higher than

the other ratings buckets. As a result, it appears that, as a whole, investing in triple Cs are a risk

worth taking; yet, we have previously identified other data that conflicts with this conclusion.

These contradictions make it evident that knowledge and expertise are crucial to finding and

exploiting the most favorable reward-versus-risk investment opportunities.

The Power of Priority

Corporations typically finance their operations with a combination of debt and equity capital,

often by issuing multiple versions (or “tiers”) of each. For example, a company may have a multi-

tiered capital structure that (in keeping with our gold mining theme) resembles a multi-layered

geologic stratification, such as follows:

Exhibit 7: The Stratification of a Multi-tiered Geologic/Capital Structure

Priority of Stratum/Payment Geologic Formation Corporate Capital Structure

1st Silt Bank Line of Credit

2nd Sand First Lien Term Loan

3rd Gravel Second Lien Term Loan

4th Clay Senior Unsecured Bonds

5th Limestone Subordinated Bonds

6th Shale Preferred Stock

7th Bedrock Common Stock

Unlike a prospector, who would carefully examine each stratum of rock for gold, investors

typically choose from only one or two layers of any given capital structure to find a way

to extract an attractive expected return given the risks incurred. And, as with any geologic

mining endeavor, focusing on certain layers will provide better rewards than others.

For example, investors at the top of the priority of payment queue are typically well-protected

if a company defaults on a debt obligation and seeks a remedy through the U.S. legal system.

So in a simple case in which a company has defaulted on its debt obligation(s) and must

be liquidated, the value unlocked through a liquidation would generally be directed to the

first priority creditors until their claim was satisfied. If there is any residual value remaining,

payments would then be made to the second priority creditors, then the third, etc., with

equity holders at the bottom of any such waterfall (and oftentimes receiving no value).



A similar assessment takes place when an in-court balance sheet restructuring (as opposed

to a complete liquidation) takes place, as the U.S. bankruptcy code acknowledges a similar

priority waterfall. From an investor’s perspective, understanding the priority of payment

position of an investment (i.e., its position in the capital structure) is of critical importance

when assessing the risk associated with a potential loss of capital.

Exhibit 8: Recovery Rate by Position in Capital Structure, 1982-2014

Source: Moody’s Annual Default Study: Corporate Default and Recovery Rates, 1920-2014, March 4, 2015.Datareflectsannualresults.past performance does not guarantee future results.

Exhibit 8 shows historical recovery rates for the different priority layers of bonds and loans

that have defaulted over the period from 1982 to 2014.14 Through this analysis, we can

observe a closer relationship between debt characteristics and losses from defaults for all

ratings classes, not just triple Cs.

Unlike the similar recovery rates observed among various ratings buckets in Exhibit 6, the

results vary dramatically depending on the layer in which an investment is made. To illustrate,

an investment in a 1st lien bank loan recovers, on average, over 60% of its value after a default,

while an investment in a subordinated bond recovers only about 25%. Consequently, to truly

assess the risk of a non-investment grade corporate debt instrument, an investor must not

only consider the fundamentals of the company, which the corporate rating generally reflects

reasonably well, but also the position of the debt instrument within the capital structure.15 As

we will discuss later, such position is not always easy to determine and may be affected by

terms and conditions that are only found deep inside a yellow-pages sized legal document.

Mining the Layers of a Capital Structure

For many short-term and/or liquidity-oriented investors, where buy or sell decisions may be

heavily influenced by volatile price swings, outright avoidance of triple Cs, which oftentimes

trade with far less liquidity than higher rated bonds, can make rational sense. But for long-term

Rec

ove

ry (

%)

0

20

40

60

80

100

1st LienBank Loan

2nd LienBank Loan

Senior Secured

Bond

Senior Unsecured

Bond

Senior Subordinated

Bond

JuniorSubordinated

Bond

SubordinatedBond

14 Of course, not every capital structure will include every category of debt instrument set forth above—which may help explain, for example, why 2nd Lien Bank Loans have not experienced as high a recovery rate as Senior Secured Bonds.

15 It may be, however, difficult to infer too much from Exhibit 8 without more data about the capital structure of any given issue included in such Exhibit (for example, one would only expect a senior unsecured bond to fare similarly to a 2nd lien loan if there was limited debt ahead of that bond, and in any event the recovery rate for an unsecured bond is likely to compare unfavorably with any secured loan within the same capital structure). As such, understanding the specific composition of the corporate structure is necessary to fully appreciate and assess risk amongst different layers of potential investment opportunities.



investors less concerned with price volatility and the ability to liquidate at a moment’s notice,

there are attractive opportunities in select issues at the low end of the ratings ladder.

Standard deviation explains risk by measuring an investment’s volatility of returns, but if one

is a long-term investor (i.e., one who seeks to hold to maturity/redemption), we argue that

the superior measure of risk involves the investment’s expected default and recovery rates.

According to Moody’s, “credit fundamentals speak mainly to probability of default rather than

loss-given-default” (default losses). It is our belief that by augmenting fundamental credit

analysis with commensurate legal and capital structure analysis, a prudent manager can

identify triple C-rated bonds that offer a favorable risk-versus-return relationship.

As previously mentioned, one major challenge in finding the gold hidden in the pyrite

is to correctly identify the true priority layer at which an investment is being made.

Corporate debt obligations are accompanied by legal documents that outline the specific

terms and conditions of the obligation, as well as the rights of both the issuer and its

creditors. Furthermore, to the extent that a capital structure has more than one secured

debt tranche, an inter-creditor agreement will outline the many features of how the

creditors will interact under certain (typically adverse) scenarios. An understanding of

these contractual rights and remedies is therefore crucial in assessing a bond’s expected

recovery rate in the event of a default.

For example, while some layers are characterized as “senior secured”, the associated legal

documents may contain very wide allowances permitting the issuer to layer on more such

debt (or, in some cases, debt that is more senior in nature), an option that is not in the

investor’s control and which could ultimately dilute the value of that position in a downside

scenario. In this case, the “actual” priority layer may not be, in practicality, the one advertised.

Likewise, an unsecured layer may include legal provisions that prohibit any further debt

issuance above it, thus protecting the creditor class from potentially adverse action by the

issuer. The key takeaway is that an investor simply cannot read the cover page of a bond

indenture to know exactly where a debt class sits in terms of priority of payment. Investors

must dig into the often voluminous legal documentation to make an accurate assessment of

structural, or legal, risk.

Like a prospector patiently combing through piles of sand to find a pebble of gold, the

depth of an investor’s due diligence is essential since, as we have seen, the outcome of an

investment gone awry is heavily influenced by its actual position in the capital structure.

Conclusion

The analysis of legal documents associated with corporate debt issuance goes part and parcel

with fundamental credit analysis—and the Moody’s studies seem to support this view. In this

paper, we have demonstrated that triple Cs have historically offered higher returns than most

other corporate debt classes. At the same time, we have also seen that the risk profile of

triple Cs (using commonly accepted measures of risk) is so high that the risk-versus-reward

relationship of triple Cs appears to be patently unattractive, especially to an investor focused

on the short- and even medium-term. A closer examination of other factors, however, including

recovery rates over the longer term, as well as priority of payment, can make the case for a

A major challenge

in finding the

gold hidden in

the pyrite is to

correctly identify

the true priority

layer at which

an investment is

being made.



Examining

recovery rates

over the longer

term, as well

as priority of

payment, can

make the case for

a more nuanced

view of triple Cs.

more nuanced view of triple Cs. In this respect, each credit must be analyzed in full in order

for an investor to properly evaluate whether the anticipated reward for investing in a triple C

debt instrument sufficiently compensates one for the associated risks.

Like many other investment options, it is only through a deep knowledge base and long

experience of sifting through prospects that one can reliably and repeatedly identify a

nugget of triple C value as opposed to only a hunk of low-grade junk.

appendix

Bps:Standsforbasispoints.Abasispointisoneone-hundredthofonepercent(0.0001).

yTW (yield to Worst Call):Thelowestpotentialyieldthatcanbereceivedonacallablebondwithouttheissueractuallydefaulting.Foracallablebond,yieldtocallisdeterminedbycalculatingtheyieldtoeachpotentialredemptiondateandselectingthelowestresult.

spread:Theyieldofabondminustheyieldofthegovernmentbondthatmatchesthematurity(orappropriatecalldate)ofthebond.

Coupon:Thestatedinterestratepaidonabond.Couponpaymentsforhighyieldbondsaretypicallymadesemi-annually.

duration:Durationisameasureofthesensitivityofabond’spricetochangesininterestrates.Generallyspeaking,abondwithadurationof2.0isexpectedtomove2%higher(orlower)fora100basispointparallelshiftdown(orup)intheyieldcurve.

Over-the-Counter (OTC): Referstothemannerbywhichadebtinstrumentistraded.Trading“over-the-counter”meansthatthedebtinstrumentistradedviaadealernetworkratherthanonaformalexchange(suchastheNewYorkStockExchange).

Bid/ask: Bid-askspreadisthedifferencebetweenthehighestpriceabuyerofasecuritywillpay,andthelowestpriceaselleriswillingtooffer.Usually,themoreliquidanasset,thelowerthebid-askspread.

disclosures

FundsdistributedbyALPSDistributors,Inc.DDJCapitalManagementandALPSDistributors,Inc.arenotaffiliated.

TheBofAMerrillLynchGlobalHighYieldIndextrackstheperformanceofUSD,CAD,GBPandEURdenominatedbelowinvestmentgradecorporatedebtpubliclyissuedinthemajordomesticoreurobondmarkets.Qualifyingsecuritiesmusthaveabelowinvestmentgraderating(basedonanaverageofMoody’s,S&PandFitch),atleast18monthstofinalmaturityatthetimeofissuance,atleastoneyearremainingtermtofinalmaturityasoftherebalancingdate,afixedcouponscheduleandaminimumamountoutstandingofUSD100million,EUR100million,GBP50million,orCAD100million.Originalissuezerocouponbonds,eurodollarbonds,144asecurities(withandwithoutregistrationrights),andpay-in-kindsecurities(includingtogglenotes)areincludedintheindex.Callableperpetualsecuritiesareincludedprovidedtheyareatleastoneyearfromthefirstcalldate.Fixed-to-floatingratesecuritiesareincludedprovidedtheyarecallablewithinthefixedrateperiodandareatleastoneyearfromthelastcallpriortothedatethebondtransitionsfromafixedtoafloatingratesecurity.Contingentcapitalsecurities(“cocos”)areexcluded,butcapitalsecuritieswhereconversioncanbemandatedbyaregulatoryauthority,butwhichhavenospecifiedtrigger,areincluded.Otherhybridcapitalsecurities,suchasthoselegacyissuesthatpotentiallyconvertintopreferenceshares,thosewithbothcumulativeandnon-cumulativecoupondeferralprovisions,andthosewithalternativecouponsatisfactionmechanisms,arealsoincludedintheindex.Securitiesissuedormarketedprimarilytoretailinvestors,equity-linkedsecurities,securitiesinlegaldefault,hybridsecuritizedcorporates,taxableandtax-exemptUSmunicipalsecuritiesandDRD-eligiblesecuritiesareexcludedfromtheindex.Indexconstituentsarecapitalization-weightedbasedontheircurrentamountoutstandingtimesthemarketpriceplusaccruedinterest.Accruedinterestiscalculatedassumingnext-daysettlement.Cashflowsfrombondpaymentsthatarereceivedduringthemonthareretainedintheindexuntiltheendofthemonthandthenareremovedaspartoftherebalancing.Cashdoesnotearnanyreinvestmentincomewhileitisheldintheindex.Informationconcerningconstituentbondprices,timingandconventionsisprovidedintheBofAMerrillLynchBondIndexGuide,whichcanbeaccessedonBloomberg(IND2[go],4[go]),orbysendingarequesttomlindex@ml.com.Theindexisrebalancedonthelastcalendardayofthemonth,basedoninformationavailableuptoandincludingthethirdbusinessdaybeforethelastbusinessdayofthemonth.Nochangesaremadetoconstituentholdingsotherthanonmonthendrebalancingdates.Inceptiondate:December31,1997.

DDJ000102 7/14/2016



May 2015 VOLUME 2 • IssUE 2

Triple C-Rated Corporate Bonds and LoansFool’s Gold or Buried Treasure?

aBOUT ddJ CapITaL ManaGEMEnT

DDJ Capital Management’s goal is to consistently produce attractive long-term investment

returns, while minimizing downside risk for our investors, which include:

> Corporate pension accounts and public retirement plans

> Endowments and foundations

> Insurance companies

> Other institutional clients

The underpinning of DDJ—a disciplined investment philosophy, coupled with a

commitment to exhaustive credit research—has remained constant since our founding

in 1996. Our highly skilled team is steadfast and focused on executing our strategy to

identify strong risk-adjusted investment opportunities in the leveraged credit markets.

For information on DDJ’s investment capabilities, please contact:

Jack O’Connor

Head of Business Development and Client Service

[email protected]

Phone 781.283.8500

Web ddjcap.com

Jack O’Connor, head of business development and client service at DDJ, is a

representative of ALPS Distributors, Inc.

Triple C-Rated Corporate Bonds and Loans - DDJ … · Stony Brook Office Park | 130 Turner Street |...

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