In Part 1 of of our series on 144A bonds (144A Bonds and Why We Buy Them), we discussed what these securities are, their increased importance in the high yield market, and why DDJ believes investors seeking exposure to high yield should embrace investing in Rule 144A issuances.
In this edition, we discuss an important trend in the high yield bond market: the prevalence of 144A-for-life bond issuance (i.e., those issued without registration rights) relative to 144A high yield bonds issued with registration rights.
As the exhibit above demonstrates, the issuance of 144A-for-life bonds has grown significantly over the last several years. The gold line in the chart displays the percentage that 144A-for-life issues represent of the entire high yield bond market outstanding, based on principal amount outstanding (with such percentages listed on the right-side axis), as represented by the J.P. Morgan U.S. High Yield Index.
The dark purple bars represent the percentage of total new issuance that is 144A-for-life in each calendar year. This chart shows that 144A-for-life bonds currently comprise a little over 50% of the overall U.S. high yield market. Since 144A bonds (both 144A-for-life and 144A with registration rights) comprise approximately 60% of the total U.S. high yield market outstanding1, one can conclude that approximately 85%2 of 144A bonds outstanding in the high yield market are 144A-for-life.
In DDJ’s view, it makes sense that a disproportionate amount of 144A high yield bonds have been issued as 144A-for-life due to the large number of private issuers in such market that do not already have any publicly-traded stock or other SEC registered securities outstanding. Given the additional requirements and costs that accompany such registration, such issuers have far less incentive to issue a security that will require SEC registration, instead simply utilizing the Rule 144A exemption to consummate a financing without any associated registration obligation.
Interested in taking deeper dive on 144A bonds? Download the full whitepaper below (originally published in November 2018).
1Source: Barclays. As of December 31, 2020. Using the Bloomberg Barclays U.S. Corporate High Yield Index as a proxy for the U.S. high yield market, and based on the amount outstanding of the 144A and Non-144A components of such index.
2Calculated by dividing the percentage of the market represented by 144A-for life bonds (52%) by the percentage of the market represented by total 144A bonds (both-144A-for life and 144A with registration rights, 61%)
DDJ Capital Management is a privately held investment manager for institutional clients that specializes in investments within the leveraged credit markets. Since our inception in 1996, DDJ has sought to generate attractive risk-adjusted returns for our clients by adhering to a value-oriented, bottom-up, fundamental investment philosophy. DDJ has extensive experience investing in securities issued by non-investment grade companies within the lower tier of the credit markets, including high yield bonds, bank loans and other special situation investments.
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