DDJ Capital Management Blog

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.