The Distressed Debt Market and a Possible New ETF on Defaulted and Distressed Bonds

Transcription

1 The Distressed Debt Market and a Possible New ETF on Defaulted and Distressed Bonds Investing in Distressed Securities GARP Chapter Meeting New York May 22, 2014 Dr. Edward Altman NYU Stern School of Business

2 Distressed Bonds: Corporate Bonds with a Option Adjusted Spread (OAS) 1,000bp Distress Ratio: Percent of High-Yield Bonds with a OAS 1,000bp 2

3 Distress Ratio History (4/30) Date Distress Ratio Annual Default Rate (t+1) Default Rate (t+1) /Distress Ratio (t) (%) 12/31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ n/a n/a 4/30/ n/a n/a Average Median Sources: Bank of America Merrill Lynch & NYU Salomon Center 3

4 12/01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/2013 Distress Ratio History (4/30) Distress Ratio Median Distress Ratio Source: Bank of America Merrill Lynch 4

5 (1Q) $ Billions Estimated Size of the Distressed Bond Market Based on Distress Ratio HY Bond Mkt Distressed Bond Mkt 1,650 1,500 1,350 1,200 1, Sources: Distress Ratio used in calculations from BofAML. HY Bond Market size from NYU Salomon Center estimates. 5

6 Distribution of High-Yield Bond Issues by OAS Over Comparable Duration Treasury Bonds, March 31, 2013 No. of Issues Percent of Total No. of Issues Percent of Total % 80.00% 70.00% 60.00% < Spread (bp) 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Source: Bank of America Merrill Lynch. Data based on the population of distressed credits including only U.S. domiciled companies. 6

7 Size of Distressed Debt Market 7

8 Estimated Face And Market Values Of Defaulted And Distressed Debt ($ Billions) (1Q) Public Debt Face Value Market Value 12/31/ /31/2013 3/31/ /31/ /31/2013 3/31/2014 Market/Face Ratio Defaulted (1) Distressed (2) Total Public Private Debt Defaulted (3) Distressed (3) Total Private Total Public and Private 1, Calculated using: (2013 defaulted population) + (2014 Defaults) - (2014 Emergences) - (2014 Distressed Exchanges). 2 Based on 4.80% of the high-yield bond market ($1.467 trillion) as of 31 M ar Based on a private/public ratio of 2.0. Source: NYU Salomon Center and estimates by Professor Edward I. Altman. 8

9 Size Of The US Defaulted And Distressed Debt Market ($ Billions) (1Q) $4,000 Face Value Market Value $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $- Source: Author s Compilations 9

10 Default Rate (t+1) % Updated Market-Based Annual Default Rate Forecast Annual Default Rate (t+1) versus Distressed Ratio (t) Annual Default Rates (t+1) vs. Distress Ratios (t) ( ) The regression equation is Default Rate = * Distress Ratio Distress Ratio (t) % y = x R 2 = Predictor Coef SE Coef T P Constant Spread S = R-Sq = 76.5% R-Sq(adj) = 75.3% Application Distress ratio (12/30/2011) of 17.88%, forecast P D for 2012 = 3.93% vs. actual of 1.62% Distress ratio (12/31/2012) of 9.88%, forecast P D for 12/31/2013 = 2.65% vs. actual of 1.04% Distress ratio (12/31/2013) of 5.29%, forecast P D for 12/31/2014 = 1.61% Distress ratio (04/30/2014) of 5.03%, forecast P D for 04/30/2015 = 1.57% Sources: Slide 6, Bank of America Securities and authors compilations 10

11 Hedge Fund Distressed Debt Index Returns (4/30) Calendar Year Dow Jones/ Credit Suisse Hennessee HFR GAI Altman-Kuehne Combined % 26.79% 29.58% 27.42% 49.30% % 18.98% 18.89% 18.19% 15.14% % 9.71% 8.25% 9.34% 1.73% % 15.78% 15.95% 15.33% 23.38% % 8.31% 5.07% 7.37% -3.30% % % % % % % 42.97% 28.54% 24.69% 55.99% % 15.47% 12.12% 16.35% 17.70% % -2.36% -2.42% -1.9% -3.02% % 13.61% 10.40% 13.8% 7.63% % 16.16% 14.04% 18.4% 19.37% 2014 (4/30) 3.45% n/a 3.06% 4.0% 5.10% ΔLM (Apr) * 0.37% n/a 0.26% 0.6% -0.83% Arithmetic Average (Annual) Rate 10.05% 12.38% 10.47% 11.63% 12.40% Standard Deviation 12.60% 17.89% 15.10% 13.51% 27.71% Compounded Average (Annual) Rate *Last Month Change. Sources: Bloomberg & NYU Salomon Center 9.31% 10.91% 9.41% 10.79% 8.71% 11

12 Market Vectors Index Solutions Launches Altman North America Defaulted And Distressed Bond Index (MVRCOV) (May 21, 2014) Forthcoming ETF on Defaulted and Distressed Bonds 12

13 Year Comparison of Returns BofA ML Distressed Index Altman-Kuehne Defaulted Bond Index Annual Total Return (%) Altman-Kuehne Defaulted Combined Index Citi High-Yield Bond Index S&P 500 Index (4/30) (1Q) (10 year) Arithmetic Avg Return Geometric Avg Return (5 year) Arithmetic Avg Return Geometric Avg Return (3 year) Arithmetic Avg Return Geometric Avg Return Sharpe Ratio (10 year)

14 Comparison of Returns: Combined Distressed & Defaulted Index with H.Y. Bonds & S&P 500 Year Annual Total Return (%) Combined Distressed & Defaulted Index, 50% Split Citi High-Yield Bond Index S&P 500 Index (4/30) (1Q) (10 year) Arithmetic Avg Return Geometric Avg Return (5 year) Arithmetic Avg Return Geometric Avg Return (3 year) Arithmetic Avg Return Geometric Avg Return Sharpe Ratio (10 year)

15 A Possible Active Distressed Debt Strategy (Volatility-Based Selections) 15

16 Annualized Return Distribution (ARD) Analysis Original OAS Volatility Average Annualized Return (Jul to Dec-2012) Annualized Performance Relative to LO VOL Portfolio HI VOL portfolio -1.30% % LO VOL portfolio 10.92% -- High-Yield Index 6.98% -3.94% Distressed Index 4.54% -6.38% S&P 500 TR Index 2.84% -8.08% Barclays U.S. Aggregate Index 5.94% -4.98% Source: E.I. Altman, J.F. Gonzales-Heres, P. Chen & S. Shin, The Return/Volatility Trade-Off of Distressed Corporate Debt Portfolios, The Journal of Portfolio Management, Winter 2014, pp

17 Annualized Return Distribution (ARD) Analysis Normalized OAS Volatility Average Annualized Return (Jul to Dec-2012) Annualized Performance Relative to LO VOL Portfolio HI VOL portfolio 3.46% % LO VOL portfolio 14.55% -- High-Yield Index 6.98% -7.57% Distressed Index 4.54% % S&P 500 TR Index 2.84% % Barclays U.S. Aggregate Index 5.94% -8.61% Source: E.I. Altman, J.F. Gonzales-Heres, P. Chen & S. Shin, The Return/Volatility Trade-Off of Distressed Corporate Debt Portfolios, The Journal of Portfolio Management, Winter 2014, pp

18 Cumulative Default Rate since First Entering a State of Distress Original OAS Volatility Source: E.I. Altman, J.F. Gonzales-Heres, P. Chen & S. Shin, The Return/Volatility Trade-Off of Distressed Corporate Debt Portfolios, The Journal of Portfolio Management, Winter 2014, pp

19 Cumulative Default Rate since First Entering a State of Distress Normalized OAS Volatility Source: E.I. Altman, J.F. Gonzales-Heres, P. Chen & S. Shin, The Return/Volatility Trade-Off of Distressed Corporate Debt Portfolios, The Journal of Portfolio Management, Winter 2014, pp

20 Time Dependent Return Analysis Normalized OAS Volatility Source: E.I. Altman, J.F. Gonzales-Heres, P. Chen & S. Shin, The Return/Volatility Trade-Off of Distressed Corporate Debt Portfolios, The Journal of Portfolio Management, Winter 2014, pp