DDJ Capital Management 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.

DDJ Celebrates 25 Years!

This March marks a significant milestone for DDJ as the firm celebrates its 25^th anniversary.  In 1996, using the insights that I honed in my previous roles as a portfolio manager at Fidelity Investments and portfolio manager and analyst at T. Rowe Price, I co-founded DDJ.  Since the inception of the firm, DDJ has consistently applied the investment process that we originally developed, which is premised upon fundamental analysis of each investment opportunity with an emphasis on exploiting the inefficiencies within the lower tier of the high yield credit market.

Have you considered steering your capital toward companies that are more in line with your environmental, social and governance values?

During the Opal Group’s recent 2021 Public Funds Summit, DDJ Portfolio Manager and Director of Research Roman Rjanikov held a discussion with Erika Kennedy, Director, Business Development, about ESG and High Yield and how investors can have the best of both worlds.

During the discussion with Ms. Kennedy, Mr. Rjanikov elaborates on:

• The potentially huge impact that investors can make via their capital allocation decisions (e.g., by rewarding specific sectors such as sustainable energy);
• Balancing the possibility of attractive returns with ESG responsibilities and goals; and
• Avoiding pitfalls associated with broad ESG mandates and third-party ESG ratings.

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.

After a wild ride for the high yield market in 2020, what does 2021 have in store?

At DDJ, we are cautiously optimistic. As DDJ’s President, CIO, and Portfolio Manager David Breazzano shares in his 2021 outlook, the high yield market offers attractive relative value and improving fundamentals; however, investors should expect periods of heightened volatility to persist:

"Given the rate environment, low to negative absolute yields across the fixed income spectrum, wide-open capital markets, and reasonable valuations in the high yield market, I am cautiously optimistic about high yield performance in 2021. Credit spreads across ratings tiers declined considerably in the fourth quarter and ended 2020 on the ‘tighter’ side of historical observations. However, the high yield market continues to offer investors attractive relative value compared to other alternatives.

If you haven’t yet read Part 1 of this series, we recommend you do so in order to build a strong foundation around the vocabulary of restructurings used in Part 2. Click here to read Part 1.

This is the second edition of our blog series related to debt restructurings. This week we will touch on what happens once a default occurs.

In part 1 of this blog series, we explained that a grace (or cure) period is a period of time following a default in which an issuer is contractually permitted to either make a scheduled payment without incurring penalty, or to repair the condition that caused a technical default, as applicable. If a grace period expires before the issuer has remedied (or otherwise obtained a waiver of) the underlying default condition (e.g., non-payment of interest), an event of default occurs under the debt documents and accordingly, certain creditors may have the right to enforce remedies (including the right to accelerate the debt in full, as described is Part 1). Creditors are unlikely to enforce remedies for “minor” or technical defaults, as the costs of enforcing such remedies often dwarf the expected benefits (as compared to a negotiated resolution); however, the occurrence of a significant event of default for which lenders are likely to enforce remedies leaves an issuer with, essentially, two choices: to seek an out-of-court reorganization or to seek protection from creditors through a bankruptcy proceeding.

Since their rise in popularity during the 1980s, high yield, or below-investment grade, corporate bonds have provided the necessary financing for a large number of companies around the world. At DDJ, we believe that many investors have overlooked the benefits of maintaining a structural allocation to this asset class. Over the long-term, high yield bonds have offered very attractive risk-adjusted returns, with low correlations to both equities and “core” fixed income products.

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.

Interested in reading about privately placed 144A high yield bonds trading on the secondary market? Did you catch our popular audiocasts on topics such as the impact of fallen angels and the factors that led to negative oil prices? Below, check out our top-three blogs of 2020.