Polen Capital Credit Blog

In our fourth edition of this blog series on 144A bonds, we explore the liquidity characteristics of 144A bonds relative to non-144A bonds, the latter of which are more often held in large cap high yield bond mutual funds and ETFs.

If you have not yet read the first three installations of this blog series, here are links to get you started:

• Part 1 - 144A Bonds and Why We Buy Them - discussing the nature of these securites, their increasing importance in the high yield market, and why DDJ believes that institutional investors seeking exposure to high yield should embrace investing in Rule 144A issuances.

Similar to the aggregate high yield bond market (“HYBI”), the lower rated CCC segment has seen meaningful change over the last year.¹ As the table below details, while the relative size of the CCC-rated segment as a percentage of the broader high yield market has changed only minimally, the number of CCC-rated issues in the CCC-rated segment has increased by 15.5% while the option adjusted spread (OAS) has compressed by just over 500 basis points (bps). These changes reflect issues that were downgraded into the CCC-rated Index, as well as those names that exited as a result of default. However, it also reflects a set of CCC-rated bonds that rode out the storm in the lower-tier during the last twelve months.

In our third edition of this blog series on 144A bonds, we explore the difference in rating agency classifications between 144A high yield bonds relative to non-144A high yield bonds.

If you have not yet read the first two installations of this blog series, here are links to get you started:

• Part 1 - 144A Bonds and Why We Buy Them - discussing what these securities are, their increased importance in the high yield market, and why DDJ believes institutional investors seeking exposure to high yield should embrace investing in Rule 144A issuances.
  
  
• Part 2 - The Prevalence of 144A-For-Life Bonds – elaborating on an important trend in the high yield bond market: the prevalence of so-called “144A-for-life” bond issuance (i.e., those issued without registration rights) relative to 144A high yield bonds issued with registration rights.

The exhibit below displays the ratings classifications of the Bloomberg Barclays U.S. High Yield Index – broken out into 144A bonds (which includes both 144A-for-life and 144A with registration rights) and non-144A bonds.

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.

“If one is concerned about valuations and the future performance and volatility of the equity markets, from a historical perspective, high yield appears cheap relative to equities at this point in the cycle.”
-David Breazzano

The following is a summary of an excerpt from our 2020 DDJ Virtual Investment Conference. To access the video featuring David Breazzano, DDJ’s President, Chief Investment Officer and Portfolio Manager, addressing this topic, please click here.

In order to better understand the current state of the high yield market and where we see opportunities, let’s first take a step back and look at it from a broader market perspective by comparing high yield to equities, with equities represented by the S&P 500 index. I believe it's important to make this comparison to better understand the relative value between the two asset classes. In addition, before we look at the current environment, it is informative to get a historical perspective, so let’s review the past two major inflection points and subsequent recoveries in those markets, with the first such inflection point occurring during the 2001 to 2004 period.

When many investors hear terms like “default” or “bankruptcy”, negativity and losses probably come to mind, and for good reason. Over the past 25 years, on average, when a high yield bond has defaulted, investors lost almost 60 cents on every dollar invested.¹

“Rule 144A is therefore very valuable to issuers, as it reduced the cost of capital by improving the liquidity of the institutional secondary market for privately placed bonds.”
– Andrew Ross, CFA, Director, Portfolio Specialist

Not familiar with 144A bonds? You’re not alone. Given the growth of bonds issued via Rule 144A (“the Rule”) and their increased importance in the high yield market, we thought it would be informative to provide a brief overview of Rule 144A and the bonds issued under this rule.