Leveraged Finance is a comprehensive guide to the instruments and markets that finance much of corporate America. Presented in five sections, this experienced author team covers topics ranging from the basics of bonds and loans to more advanced topics such as valuing CDs, default correlations among CLOs, and hedging strategies across corporate capital structures.
This book attempts to tie the various pieces that comprise the leveraged ﬁnance market together. Its 14 chapters are divided into ﬁve parts: Part One: The Cash Market, Part Two: The Structured Market, Part Three: The Synthetic Market, Part Four: How to Trade the Leveraged Finance Market and Part Five: Default Correlation.
Part One addresses the cash markets, which include high-yield bonds (also referred to as speculative-grade or junk bonds), and leveraged loans. Part Two takes a look into the structured market, focusing on one type of collateralized debt obligation—collateralized loan obligations (CLOs). Collateralized loan obligations (CLOs) have been around for over 20 years and until September 2007 bought two-thirds of all U.S. leveraged loans. A CLO issues debt and equity and uses the money it raises to invest in a portfolio of leveraged loans. It distributes the cash ﬂows from its asset portfolio to the holders of its various liabilities in prescribed ways that take into account the relative seniority of those liabilities.
Part Three introduces the relatively young synthetic markets, which include credit default swaps (CDS), the traded credit indexes, and index tranches. Credit default swaps enable the isolation and transfer of credit risk between two parties. They are bilateral ﬁnancial contracts which allow credit risk to be isolated from the other risks of an instrument, such as interest rate risk, and passed from one party to another party. Aside from the ability to isolate credit risk, other reasons for the use of credit derivatives include asset replication/diversification, leverage, yield enhancement, hedging needs, and relative value opportunities. Like Part One, we start with the basics. Part Four reviews how investors can trade within the leveraged ﬁnance market.
Part Five addresses default correlation. Default correlation is the phenomenon that the likelihood of one obligor defaulting on its debt is affected by whether or not another obligor has defaulted on its debts. A simple example of this is if one ﬁrm is the creditor of another—if Credit A defaults on its obligations to Credit B, we think it is more likely that Credit B will be unable to pay its own obligations.
- The High-Yield Bond Market
- Leveraged Loans
- Collateralized Loan Obligations
- CLO Returns
- CLO Portfolio Overlap
- Credit Default Swaps and the Indexes
- Index Tranches
- Recessions and Returns
- Framework for the Credit Analysis of Corporate Debt
- Trading the Basis
- How Much Should You Get Paid to Take Risk?
- Default Correlation: The Basics
- Empirical Default Correlations: Problems and Solutions