FI06 Corporate Bonds 6523d7e802edb

• Cash Equities
Corporate Bonds
W W W. W A L L S T R E E T P R E P. C O M
v
Government Bonds
We’ll focus on Corporate Bonds in this chapter

Buy Side Investors Sell- Side
Banks, Retail Brokerages, Asset Managers, Mutual Funds, Buy From
Broker-Dealers,
Insurance Companies, Pension Funds, Hedge Funds Investment Banks
Money Market Fixed Rate Floating Rate Derivatives
Cash Interest Rate Swaps Foreign Exchange
Federal T-Bills Treasuries Treasury FRN Interest Rate Swaps
Agency Discount Notes Agency Agency FRNs
Municipal Commercial Paper Munis FRN, VRDOs, ARS
Credit Risk
Mortgage Repo (Financing) MBS Credit Default Swap
Autos ABS
Asset Backed CP
CLO, Loans
Corporate Commercial Paper
Loans Corporate FXD Corporate FRN Credit Default Swap
Bonds
Shares CD / Bank Deposit
Shares/Equities Equity Swaps /D1
2
Licensed to Kevin Romanteau. Email address: kromanteau.mifft2021@london.edu
Corporate Bonds
Chapter Goals
◽ Convention difference between ◽ High Yield Bonds
Government Bonds and
Corporate Bonds ▸ Yield to Call
◽ Spreads: G, T, I, Z ◽ Credit Analysis
◽ Credit Curves ▸ Ratings and Ratios
◽ DV01 ▸ Seniority and Recovery Rates

◽ Trading and Markups on a Bond
◽ Pricing a Bond:
▸ Secondary Curves
▸ Relative Value
▸ New Issue Premiums
3
Corporate Bonds
Investment Grade Bond Conventions

US Treasuries US Fixed Rate US Floating Loan
Corp Bond Rate Note
Issuance Process: Auction Bookbuild Bookbuild Bilateral
Negotiation
Interest: Fixed Rate Fixed Rate Floating Rate Floating Rate
Semi-Annual, Semi-Annual, Quarterly, Quarterly,
Act/Act 30/360 Actual/360 Actual/360
Unadjusted Unadjusted Adjusted Adjusted
Issue Price: Premium Discount to Par At Par (100%) At Par (100%)
/Discount to Par
Documentation: None Prospectus & Prospectus & Negotiated Loan
Termsheet Termsheet Agreement
Trading Fractional Trades on Spread Trades on a “Trades by

Conventions: 100-14+ to Treasury, Price Discount Margin, appointment”
rounded to 3 Price rounded to 3
decimal places decimal places
Settlement: T+1 T+2 T+2 Around 2 weeks
Licensed to Kevin Footer

Romanteau. Email address: kromanteau.mifft2021@london.edu
Corporate Bonds
Yield Curves
• The US Treasury Market forms a US Treasury Yield Curve
basis for the US Fixed Income
Market
• We can plot a yield curve, with

Yields on the Y axis, and Treasury
Bonds of different maturities on the
X axis
• In the graph to the right, each green

dot represents the yield of a US
Treasury of that tenor To recreate this graph in Bloomberg, hit GC <GO>
for Graph Curves and select the US Treasury Actives
• “Connecting the dots” has a fancy Curve
word in Fixed Income and we refer

to it as Linear Interpolation

Corporate Bonds
Linear Interpolation
Table of Yields from GC Graph
• If the 3 year US Treasury yields 1.800% and the 5 year US Treasury yields and
1.833%
• Then we can “interpolate” the 4 year yield as 1.8165% (mid-point between the
3 year and the 5 year)
• For a more precise Interpolation, you can enter in Bloomberg: ICUR # <GO>
where # is the number of years (decimals work) from today

Corporate Bonds
Building Yield Curves for Valuing High Grade Bonds

• We’ve plotted the Government curve in Green by using Interpolated Yields of US Government bonds of
varying maturities
• The Swaps Curve in Blue is plotted is built from Interest Rate Swap Market. Market prices for interest
rate swaps are available for a broad range of maturities and then linearly interpolated
• For a frequent corporate bond issuer with many bonds that are actively traded across a range of
maturities, we can graph a spread curve in the same way we interpolate government bond yields
Apple’s Bond
Curve
Government
Curve
Swaps
Curve
Bloomberg Tip: To Recreate this chart, Hit GC <GO> for graph curves and enter the following curves: BI550, S23 ,BI114. The tenors shown are 2 years to 30 years

Corporate Bonds
Spreads to the Government Curve

• The Swap Spread, the Swap spread is the Swap Yield less the Government Yield
• The G-Spread, the Corporate Yield less the same maturity Government Yield
Spread to
Governments “G-
Spread”
Swap Spread
Used to determine Libor
Equivalents of Floating
Rate Notes
Negative 33 bps is the US

30 Year Swap Spread
103.7 bps is Apple’s 30
Year G Spread

Corporate Bonds
What does the G-Spread Represent?

• The G Spread represents the additional Yield an investor
would receive by owning a Corporate Bond over owning a
Government Bond Corporate
• A Government Bond in the same currency as the Bond Issue is
Bond Yield
generally considered credit risk free as the Government could
print more money to repay obligations
G
• A corporation does not have the same ability to print money.
Spread
The rating agencies reflect this by limiting the corporate bond
rating to the sovereign rating
• Government Bonds Advantages Government

Yield
◽Higher credit quality
◽More liquid (easier to trade) Same Maturity

(Interpolated)
◽Cheaper Financing / Better Terms

Corporate Bonds
The T Spread versus the G Spread

• US Corporate Bonds are traded on a T spread
versus a G Spread. What is the difference?
Corporate
• A T spread compares the Bond to the On-The- Bond Yield
Run Treasury which will be a slightly different
maturity
T G
• The advantage is a Treasury that is frequently
traded with a transparent yield, versus trying Spread Spread
to negotiate multiple data points to
interpolate a yield to an odd maturity
• In practice, Issuers, Traders and Investors all On the Run Gov’t

consider the G Spread for relative value Treasury Curve
• Some 5.5 year and 10.5 year bonds were
Different Same
issued as the higher spread versus a 5 year or
10 year was optically more attractive Maturity Maturity

Corporate Bonds
Example: Apple Corporate Bond

• The following bond is an Apple Apple Corporate Bond DES Screen
Corporate Bond. It was issued in 2014 AAPL 3.45 05/06/24 Corp <GO>
and had an original 10 year maturity
DES <GO>
• It was priced off the on-the-run 10 year
when it was issued.
• In 2019, the Bond has a 5 year remaining
maturity
• The bond currently trades off the on the
run 5 year US Treasury, the 2% coupon
maturing in May 2024
• If I was asking a trader for this bond, I
would verbally refer to it as “Apple 3
point 4 5 of May 24” omitting the day of
the month where it matured

Corporate Bonds
Trader Runs
• A trader run is a sheet is a menu of
Salespeople forward runs to their clients
bonds that the trader is willing to trade
using the keystroke 3-GO 1-GO
and their bids and offers (where they
would buy and sell the bonds)
• The runs are quoted off a Treasury
spread, with the underlying treasury
moving and spreads staying relatively
stable
• Traders can create runs using the RUNZ
function. Traders typically save the
bonds in a workbook and update the
spreads based on market movements
• Trader runs are sent via Bloomberg
messenger and can be accessed via the
MSG function or MSG button

Corporate Bonds
The Bloomberg YA Screen

• The bond currently trades off the on the
run 5 year US Treasury, the 2% coupon
maturing in May 2024 Apple Corporate Bond YA Screen
• That treasury was trading at the time of

the screenshot a yield of 1.814688%
• The trader offer on the bond, or price
where they will sell it at, was “/+55”
meaning the 5 year Treasury yield plus
55 basis points. The slash “/” is to
indicate the offer side
• The yield on the corporate bond is
2.46488% (or 1.814688%+0.55%)
• Other key details such as Duration,
Risk/DV01 and Accrued Interest are on
the YA Screen

Corporate Bonds
Executing a Corporate Bond
Bloomberg Chat with a Trader A VCON Ticket Confirms the sale

Corporate Bonds
Using DV01 on a Corporate Bond

• Using our Apple Corporate Bond example, the trader Apple Bond YA Screen T+55
quoted you an offer of T+55
• Imagine you are the salesperson and you wanted to

mark-up the bond and earn additional commissions
on the sale
• For any asset, you want to sell it from higher than you
bought it for. Price and Yield are inversely related, so
if I wanted a higher price, I need to sell it for a lower
yield
• Instead of T+55, I am going to sell it for T+54. How

much do I earn for marking-up the bond by 1 basis
point running? Apple Bond YA Screen T+54
• The answer is the DV01 – which is $471 on a $1
million notional
• Compare the settlement amounts:
◽ At T+55, you would sell it for $1,048,650
◽ At T+54, you would sell it for $1,049,121
◽ The difference is $471, or the DV01

Corporate Bonds
DV01
• DV01 stands for the Dollar Value of 1 Basis Point. It can be called “01”
• One basis point is 1/100 of a basis point. 1% = 100 basis points,
abbreviated bps. 0.01% = 1 bps
• DV01 Changes as the Notional Changes. A 1 bp markup on a $1mm is
not the same as $10mm
• To convert between dollars and basis points, divide by 10,000. 1 basis
point on 10,000 is $1. This only applies for bps upfront versus bps
running
• 1 basis point on $10 million is 1,000. Salespeople like to think in
increments of $10mm for easy math
• Salespeople and Traders care about the DV01 as this is how much they
make by marking up the bond by one basis point

Corporate Bonds
DV01, Risk on Bloomberg, Modified Duration

• A similar metric on Bloomberg is called Risk. It is identical to DV01
except expressed in a basis points versus a dollar value. For Example:
◽DV01: $471. 1 bps move in rates (yield) on each $1 million notional is
$471
◽Risk 4.71, 1 bps move in rates (yield) up will move the price down
4.71 bps
• This is the same concept as Modified Duration, but moving by 1/100th
of the increment
• Modified Duration and DV01 are similar measures but will be
different. The difference between coupon and yield matter, and going
from 2.50% to 2.51% versus from 2.50% to 3.50% is the difference in
impact between DV01 and Modified Duration

Corporate Bonds
Corporate Bond Spread to Swaps Both reference

Same Maturity
• The following to spread to swaps are Corporate

generally quite similar Bond Yield 2.50%
• We graphed the I Spread when I 50

analyzing Swap Spreads and Spread bps
comparing the Swap Curve to the
Treasury Curve Swap Curve 2.00%
• In practice, Bonds are analyzed off the Corporate

2.50%
Z Spread when comparing the bonds Bond Yield
yields to Swaps and I Spreads are 49
Z
rarely used. Bloomberg will calculate
Spread bps
both for you.
Swap Zero
2.01%
Swap Curve references an Interest Rate Swap with Fixed Coupons. Rate is the Curve
Fixed Coupon that results to a Zero Present Value versus LIBOR

Corporate Bonds
New Issue Bond Schedule
Final
“Go/No- Book
Pre-Call Announce Pricing
Go” Call Update
Guidance
• Around • Around • Around 8AM • Mid Morning • Around
7:30AM 7:45AM Lunchtime
Books
Launch Free-to-
Close & Allocate Settle
and Priced Trade
Reconcile
• Around 1pm • Around 2pm • Around 3pm • End of Day • Bonds are
settled

Corporate Bonds
Bond Example: Keybank 3 year Fixed
• January 24th 2019 Trade, Key Bank

NA
• Announce: 3 year Treasuries + 95
area for the Fixed Rate Note and
Libor Equivalent for the FRN
• Final Guidance was T+80 area (+/-
2 bps) or T+78-82 range
• The transaction priced at the tight
end of that range at T+78
• $1 billion Issue, Split $600mm
Fixed Rate, $400mm Floating Rate
Bloomberg Tip: To load up this bond in Bloomberg, type in KEY 3.3 02/01/22 Corp <GO> DES

Corporate Bonds
Exercise 14: T, G, I and Z Spreads

• You are seeking to buy the KeyBank 3
year Fixed Rate Bond
• You’ve been quoted an offer of T+55
• Calculate the Bond’s Yield to Maturity
and T-Spread, G-Spread, I-Spread and Z-
Spread using the following information
◽ 3 Year On-The-Run Treasury Yield:
1.797%
◽ Interpolated Treasury to 2/1/2022:
1.82%
◽ Swap Rate to 2/1/2022: 1.847%
◽ Zero Curve Rate to 2/1/2022: 1.853%

Corporate Bonds
Exercise 14: Solution
3 Year On-The-Run
Treasury Yield: T-Spread:
55 bps
1.797% 0.55% 2.347%
0.0055
55/10,000
Bond Yield to
Reference: Spread:
Maturity:
T Spread: 2.347% 1.797% 55.0 bps
G Spread: 2.347% 1.820% 52.7 bps
I Spread: 2.347% 1.847% 50.0 bps
Z Spread: 2.347% 1.853% 49.4 bps

Corporate Bonds
Exercise 14: Bloomberg Solution

• KEY 3.3 02/01/2022 Corp <GO> DES
T
Spread
Yield Calculation
G, I and Z
Spreads

Corporate Bonds
Exercise 15: Building out the Bond Cashflows

Bond Calculations
1. Enter in the Settlement Date of 6/20/2019
2. Calculate the Fractional Period
3. Using the Benchmark Yield, and offer spread of T+55, calculate the Bond Annual
Yield to Maturity
4. Enter in the Coupons Per Year and Calculate the Period Yield
5. Calculate the Interest Payment and Final Principal Payment
6. Sum the Total Cash Flows
7. Adjust the Coupon Number by Fractional
8. Calculate the Yield Present Value by discounting the Total Cashflow by your
Period Yield
9. Sum the Present Value to calculate the Bond Price and Proceeds

Corporate Bonds
Valuing New Issue Bonds

New Issues impact the entire credit trading floor
Syndicate Sales Trader
• Suggest New Issue • Demonstrate Value of • New Issues are

Pricing to Bond bond to Investor actively traded
Issuers • Position for switch
trades
Drivers of new issue bond valuation
Secondary Curve Relative Value New Issue Premium
• Where are existing • How does the • Is the New Issue

bonds trading secondaries Premium fair?
compare with peers

Corporate Bonds
Pricing considerations for Corporate Bonds

• Unlike Equities, ratings are a key driver in Bond pricing and much more
important than sector
• Some sectors do trade tighter due to scarcity value (consumer versus
Telecom)
• Credit spreads are almost always upward slopping (and rarely inverts
unlike the Yield Curve). Longer bonds trade at wider spreads
• Financials and Non-Financials trade differently. At times, financials
could trade wider and vice versa. Be careful with the terminology of
Corporates, DCM teams generally use Corporates to refer to Non-
Financials while traders use Corporates to refer to all Corporate Bonds
or Credit products under the “Corporate” Bloomberg Key

Corporate Bonds
Ratings can vary across the same industry
Name Ticker Moody’s S&P Fitch

Toyota Motor Credit Corp TOYOTA Aa3 AA- A+
BMW US Capital LLC BMW A1 A+ NR
American Honda Finance Corp HNDA A2 A NR
Mercedes-Benz Finance Co Ltd DAIGR A2 A A-
Nissan Motor Acceptance Corp NSANY A3 A- NR
Volkswagen Group of America Finance VW A3 BBB+ NR
Hyundai Capital America HYNMTR Baa1 Baa+ NR
General Motors Financial Co GM Baa3 BBB BBB
Ford Motor Credit LLC F Baa3 BBB BBB
Fiat Chrysler Automobile FCAIM Ba2 BB+ BBB-
Tesla Inc TSLA Caa1 B- NR

Corporate Bonds
Gathering Secondary Levels

• Bond traders create their runs using the RUNZ function
• You can utilize the RUNZ function on Bloomberg to calculate the G and Z spread of
multiple bonds quickly

Corporate Bonds
Building the Secondary Curve

• The secondary curve build out is a conceptual build versus something very technical built
in Excel. The calculations are rounded. Only tenors where are new issue is likely is needed
for this exercise
F 5.596 01/22
G+150.06
F 3.813 10/21
G+149.487
2y 3y 4y 5y 6y 7y 8y 9y 10y
Maturity 06/21 06/22 06/23 06/24 06/25 06/26 06/27 06/28 06/29
Today = “June 2019”

Corporate Bonds

for this exercise
F 4.14 02/23
F 5.596 01/22 G+182.755
G+150.06
F 3.813 10/21 F 5.584 03/24
G+149.487 G+220.489
2y 3y 4y 5y 6y 7y 8y 9y 10y
Maturity 06/21 06/22 06/23 06/24 06/25 06/26 06/27 06/28 06/29
T+145 T+155

Corporate Bonds

for this exercise
F 4.14 02/23
F 5.596 01/22 G+182.755
G+150.06
F 3.813 10/21 F 5.584 03/24 F 4.687 06/25
G+149.487 G+220.489 G+233.379
2y 3y 4y 5y 6y 7y 8y 9y 10y
Maturity 06/21 06/22 06/23 06/24 06/25 06/26 06/27 06/28 06/29
T+145 T+155 T+225

Corporate Bonds

for this exercise
F 4.14 02/23
F 5.596 01/22 G+182.755
G+150.06
F 3.813 10/21 F 5.584 03/24 F 4.687 06/25
F 5.113 05/29
G+149.487 G+220.489 G+233.379
G+282.896
2y 3y 4y 5y 6y 7y 8y 9y 10y
Maturity 06/21 06/22 06/23 06/24 06/25 06/26 06/27 06/28 06/29
T+145 T+155 T+225 G+234

There is no on-the run treasury for 6 years, keep as
a G spread and we’ll adjust later

Corporate Bonds

for this exercise
F 4.14 02/23
F 5.596 01/22 G+182.755
G+150.06
F 3.813 10/21 F 5.584 03/24 F 4.687 06/25
F 5.113 05/29
G+149.487 G+220.489 G+233.379
G+282.896
2y 3y 4y 5y 6y 7y 8y 9y 10y
Maturity 06/21 06/22 06/23 06/24 06/25 06/26 06/27 06/28 06/29
Secondary T+145 T+155 T+225 G+234 T+240 T+283

Curve

There is no on-the run treasury for 6 years, keep as
a G spread and we’ll adjust later

Corporate Bonds
Relative Value
• GM is the logical comp for Ford with similar ratings and industry. GM trades tighter than
Ford in the secondary market, which helps the relative value on a spread basis
• The relative value check is for both the spreads as well as the curve (spread pickup to go
from 3y to 5y, and from 5y to 10y for example)
GM 5 year to 10 year
GM 3 year to 5 year
curve roughly ~57 bps
curve roughly ~60 bps
GM 4.2 11/21
G+116
GM 3.55 7/22
G+125 GM 5.1 01/24 GM 5.65 06/29
G+172 G+242
Ford 2y 3y 4y 5y 6y 7y 8y 9y 10y
Maturity 06/21 06/22 06/23 06/24 06/25 06/26 06/27 06/28 06/29
Secondary T+145 T+155 Don’t T+225 G+234 T+240 Don’t Don’t T+283
Curve Show Show Show
Ford 3 year to 5 year Ford 5yr to 10 year
curve roughly ~70 bps curve roughly ~58 bps

Corporate Bonds
New Issue Premium

• New Issue Premiums depend very much on investor sentiment and inflows of cash. A small single
digit premium is generally considered a good result
• The actual calculation has some “fudge factor” as there maybe some debate
Ford 2y 3y 4y 5y 6y 7y 8y 9y 10y
Maturity 06/21 06/22 06/23 06/24 06/25 06/26 06/27 06/28 06/29
New Issue
Premium 5 bps
New Bond
Spread
(“Reoffer T+150
Spread”)

Corporate Bonds
Exercise: New Issue Premium

• If Ford, an auto manufacturer rated (Baa3, BBB, BBB) was looking to issue a new bond, which of the
following would impact New Issue Premium?
• What is the overall sentiment in the market?
• There isn’t one answer – you can have different New Issue Premiums based on different tenors
Ticker Name Rating Size Tenor Final Delta NIP Covered

HYNMTR Hyundai Cap. Americas Baa1/BBB+ 400m 3 year +120 18 2 3.0x
EQR EQR (REIT) A3/A- 600m 10 year +97 15.5 7 2.3x
CBT Cabot (Chemicals) Baa2/BBB- 300m 10 year +195 5 5 1.5x
BAC Bank of America Baa3/BBB- 1,000m PerpNC5 5.125% 19 N/A 2.5x
JACLIF Jackson Life Insurance A1/AA- 300m 5 year +85 13 N/A N/A
JACLIF Jackson Life Insurance A1/AA- 300m 10 year +100 15 3 1.7x
KKR KKR Group Finance A/A 500m 20 year +170 20 N/A 2.4x
MAERSK APMM (Shipping) Baa3/BBB 500m 10 year +250 10 35 1.7x
LNT Wisc. Light & Power A2/A 350m 10 year +95 15 N/A 1.7x

Corporate Bonds

Similar Sector
Similar Ratings
CBT Cabot (Chemicals) Baa2/BBB- 300m 10 year +195 5 5 1.5x
MAERSK APMM (Shipping) Baa3/BBB 500m 10 year +250 10 35 1.7x

Corporate Bonds

Less Relevant
EQR EQR (REIT) A3/A- 600m 10 year +97 15.5 7 2.3x
BAC Bank of America Baa3/BBB- 1,000m PrepNC5 5.125% 19 N/A 2.5x
JACLIF Jackson Life Insurance A1/AA- 300m 5 year +85 13 N/A N/A
JACLIF Jackson Life Insurance A1/AA- 300m 10 year +100 15 3 1.7x
KKR KKR Group Finance A/A 500m 20 year +170 20 N/A 2.4x
LNT Wisc. Light & Power A2/A 350m 10 year +95 15 N/A 1.7x

Corporate Bonds
Re-Offer Spreads
• Re-Offer spreads are used on a Syndicate Pricing Sheet to show fair value of where a new
bond issuance would come
• The Re-Offer Spreads takes the secondary curve plus a New Issue Premium
2y 3y 4y 5y 6y 7y 8y 9y 10y
Maturity 06/21 06/22 06/23 06/24 06/25 06/26 06/27 06/28 06/29
New Issue +5 +7 +15 +20 +20 +27
Premium
G-Spread G+254 +310
Re-offer T+150A T+160- T+240A T5+260A T+260A T+310A

Spread 165
Re-Offers can be entered in 6yr UST Interp at 1.81%,

as an Area (A) or a Range 6 bps over 5 year UST

Corporate Bonds
The Syndicate Pricing Sheet

• The Syndicate Team prepares a Pricing Sheet on a periodic basis for frequent issuers
seeking to access the market
• The syndicate team formalizes this process in a table for issuers
• Salespeople and investors would complete a similar process to determine the value of a
new bond issuance
2y 3y 5y 6y 7y 10y
Treasury Yield 1.732% 1.682% 1.746% 1.746% 1.871% 2.014%
Re-offer Spread T+150A T+160-165 T+240 T5+260A T+260A T+310A
Re-offer Yield 3.232% 3.282-3.322% 4.146% 4.346% 4.471% 5.114%
Spread to 3m$L L+146 L+157-162 L+238 L+254 L+262 L+312

Corporate Bonds
Comparing High Grade to High Yield Bonds

US High Grade Bonds US High Yield Bonds
Coupon Fixed Rate Fixed Rate
Coupon Convention 30/360 Semi-Annually 30/360 Semi-Annually
Documentation Typically SEC Registered or Typically SEC Registered
Similar
144A (or another or 144A (or another
exemption) exemption)
Collateral Typically Uncollateralized Typically Uncollateralized
Settlement T+2 Days T+2 Days
Calls Generally none except Calls are Common

Make-Whole or Regulatory
Calls
Pricing Convention Traded on a Spread to Traded on Price basis to 3
Treasury basis, settled on a decimal places, Different
price basis to 3 decimal increments of an eighth
places (fractions)
Ratings Baa3 or Higher Ba1 or Lower

Corporate Bonds
Considering recovery values

• Recall comparing 2 US Treasuries one with a $104 handle price and one
with a $127 handle price
• When comparing US Treasuries where default risk is low, the key
pricing consideration is the timing of cash flows and whether they were
appropriately considered
2.625% Coupon - $104 Price 5.25% Coupon - $127 Price

Corporate Bonds
Considering recovery values

• Recall comparing 2 US Treasuries one with a $104 handle price and one
with a $127 handle price
• When comparing US Treasuries where default risk is low, the key
pricing consideration is the timing of cash flows and whether they were
appropriately considered
• High Yield Bonds carry a higher degree of default risk. In the event of
default, investors can claim the par value of the bond and any accrued
but unpaid interest. They cannot claim the premium of buying a bond
for $127 in bankruptcy court
• The Bond Investor can place a claim for the face value of the bond and
any accrued but unpaid coupon. In a distressed situation where the
default risk is high, bonds will trade toward the value where investors
think they can recover in bankruptcy court

Corporate Bonds
GM Credit Spreads and Rating Agencies
GM CDS Credit Spread Moody’s Sr. Unsec

• Baa3 (Jan 2017-)
• Ba1 (Sep 2014)
Improving Financials
• Ba2 (Dec 2013)
Higher Credit Ratings
Lower Credit Spread • Ba3 (Oct-2011)
S&P Sr. Unsec

• BBB (Jan 2017-)
• BBB- (Sep 2014)
• BB (Jan 2012)
• B+ (Mar 2011)

Corporate Bonds
Ratings Drift
• What’s more likely – Ratings Upgrade or Downgrades?
• Ratings drift is the average issuer rating upgrade versus downgrade (Ba2 to Ba1 is plus
one notch)
• How much is macroeconomic? How much of it is sector specific?

Corporate Bonds
High Grade vs. High Yield Issuers
High Grade High Yield
• More Leveraged
• More Debt per Cashflow
• Debt to EBITDA Ratio Used
• EBITDA as a Cash Flow Proxy
Higher notional of
• E.g. 4.0x Debt to EBITDA
bonds per Issuer
• If Business Declines – Debt level remains constant,
EBITDA declines, increasing the ratio and reducing
the ability to repay debt

Corporate Bonds
Historical Default Rates

• Default rates are cyclical and generally increase during a recession
• High Yield Issuers default at a higher rate than Investment Grade Issuers
• Compare by notional or by issuer count. Lehman was originally Investment Grade rated
and had more debt outstanding than an average High Yield issuer

Corporate Bonds
Different types of debt issuance
Bonds Loans
Secured
1st Lien 1st Lien
2nd Lien 2nd Lien

Senior
Unsecured
Senior Senior
Unsecured Unsecured
Bond Loan
Subordinated
Mezzanine Mezzanine
Subordinated Subordinated
Junior Junior
Subordinated Subordinated

Corporate Bonds
Senior Creditors
• The term pari-passu is commonly used. This is a latin word for saying equal footing
• All senior creditors receive an equal share of funds available to senior unsecured
investors to support any remaining claims
• Collateral is a common differentiator amongst senior creditors
• Cash raised from selling collateral (collecting accounts receivables or inventory for
example) will first be used to pay off holders of senior creditors who have claims
supported by that collateral
• Proceeds from collateral not tied to (or with a Lien on) any creditor will go into the
general pool of unsecured cash available to all senior creditors
• Collateralized creditors can also have preference amongst themselves:
◽ First Lien holders are paid first from cash flows generated from their pool of
collateral
◽ Second Lien holders are paid if there are any remaining funds from the collateral
pool after first lien holders are paid off. Note that second lien holders can still be
senior creditors

Corporate Bonds
Recovery Rates vary by product

Corporate Bonds
Waterfall – Who gets repaid first?

• Waterfall Payments describe the order of which creditors get paid from the assets of a
company in a bankruptcy situation. Each class of creditors need to be fully repaid before
the next class gets paid
Taxes
Employee
Wages
DIP
Company Financing
Assets Senior
Creditors
Subordinated
Creditors
Equity
Holders
Note: Simplified Example for Illustrative Purposes

Corporate Bonds
Creditor waterfall
Employee • Unpaid taxes are employee wages are generally at the top of
Taxes the waterfall
Wages
• Bankrupt companies typically borrow money to pay lawyers
DIP Financing and to keep operating during bankruptcy (if court allows)
• Court approved post-bankruptcy claims have priority
• Most bonds and loans fall here. Suppliers/vendors are

Senior Creditors
typically lumped with senior creditors
Subordinated • Mezzanine and other debt agreed to be paid after all senior
Creditors creditors
• Paid last if there are remaining funds

Equity Holders • Typically wiped out in bankruptcy
Note: Simplified Example for Illustrative Purposes
Footer
Corporate Bonds
Waterfall Example among Senior Creditors

1) Use non-collateralized cash to pay to Taxes, Wages, DIP Cash from Non-
2) Pay to Taxes, Wages, DIP if cash from non-collateralized
Collateralized Assets
assets are insufficient
1
Cash from
Collateralized 2 Taxes, Wages, DIP
Assets
3) Pay to First Lien Senior
4 4) Pay to Second Lien Senior if cash Cash to Senior
remains after paying first lien Creditors
3
5) Remaining cash go to general Senior pool
5 Remaining Cash Split
Pari-Passu
First Lien Second Lien Unsecured Unsecured Unsecured

Senior Senior Loan Bond Claim

Corporate Bonds
Exercise 16: Calculating Recoveries

• Case A is solved for you. Use this as a reference and build Case B and C
• Calculate the Recovery Amounts and Recovery Percentage for each class
• Once completed, turn and talk with your neighbor on the different scenarios and
summarize key takeaways
Capital Structure Claim Cash Raised Case A Case B Case C

Taxes, Wages, DIP 10 Non-Collateralized Assets 100 0 100
Collateralized Assets 100 180 40
First Lien Senior 50
Second Lien Senior 25
Unsecured Loan 5
Unsecured Bond 100
Unsecured Claim 20

Corporate Bonds
Exercise 16: Solution
Cash Raised Case A Case B Case C

Non-Collateralized Assets 100 0 100
Collateralized Assets 100 180 40
Capital Structure Claim A- $ A-% B-$ B-% C-$ C-%
Taxes, Wages, DIP 10 10 100% 10 100% 10 100%
First Lien Senior 50 50 100% 50 100% 45.625 91%
Second Lien Senior 25 25 100% 25 100% 10.0625 56%
Unsecured Loan 5 4.6 92% 3.8 76% 2.8125 56%
Unsecured Bond 100 92 92% 76 76% 56.25 56%
Unsecured Claim 20 18.4 92% 15.2 76% 11.25 56%

Corporate Bonds
Repayment Waterfall Takeaways
All Senior Debt is Pari- Second Lien Debt is not

Taxes, Wages and DIP Passu Subordinated
Financing gets paid • Collateralized debt has • Second Liens have collateral
first preference on collateral preference after first lien but
cashflows ahead of unsecured senior
Loans and Bonds are Vendor claims are

treated equal added to senior claims
• Collateral is the • The total amount of senior
differentiation, and Loans claims can be more than just
are typically collateralized outstanding bonds plus
loans

Corporate Bonds
Introducing IQVIA Case Study

• On May 6, 2016, Quintiles and IMS agreed to merge in an all-stock deal
• The transaction was closed in October 2016
• The two companies are both Healthcare companies but operate in different
areas
◽ IMS provides pharmaceutical market data focused on SaaS applications
on its cloud platform
◽ Quintiles was a Contract Research Organization (CRO). Quintiles
performs clinical trials to pharmaceutical companies testing out new
drugs
• The new company was renamed IQVIA
• IMS shareholders owned 51.4% of the combined company with Quintiles
shareholders owning the remaining portions

Corporate Bonds
Merger Rationale
• Criticism at merger
• Different phases: Mature vs Growth
• Can equity markets value a blended

company?

Corporate Bonds
Why would an all-stock transaction need financing?

• Quintiles shareholders received IQVIA stock. IMS share holders received
IQVIA stock. Existing loan agreements were renegotiated and part of the
new company
• Why the need for cash? To buy back shares
• The existing investors (PE Funds) wanted to sell their shares
• These funds sold their shares to the market in a secondary offering (selling
shareholders receive cash, company doesn’t receive cash)
• IQVIA then repurchased shares for two reasons
• To offset the impact of some of the selling shareholders (TPG, CPPIB,
Bain etc) floating more shares onto the market
• To improve the company’s EPS as the company’s financials lagged the
merger guidance

Corporate Bonds
IQVIA High Yield Bond

• On May 7th, 2019, IQVIA issued a
$1.1 billion 8 year Non Call 3 year
Senior Unsecured Bond
• The bond was issued under the
144A/Reg-S Exemption (and
carries separate CUSIPs for the
144A and Reg-S notes)
• The purpose of the note was to
repay the borrowings under the
Issuers’ Revolving Credit Facility
(Revolver), Fees and General
Corporate Purposes
• The Bond was priced at par and
carries a 5% Coupon

Corporate Bonds
IQVIA’s Credit Rating Profile

With the bond loaded in Bloomberg, typing CRPR <GO> allows us to see the company’s Credit Rating Profile
The Bond Rating is the

same as the Senior
Unsecured Debt
Rating Ba3
Ratings Outlook vs.

Watch
Watch is an near term
change, Outlook is a
longer term change
The Long Term

Rating is an Issuer
Rating and looks at
the overall company
credit risk.
The Ba2 is one notch
higher than the bond
rating, due to loans
benefiting from Clicking on the rating itself
collateral will show you the history

Corporate Bonds
Analyzing the Corporate Structure

• Selecting the Company Tree Ratings on the CRPR page will allow you to see
subsidiaries and parent companies, and will also allow you to see if any of these
companies are also rated

Corporate Bonds
Finding the Call Schedule on Bloomberg

• Under the schedules tab on the DES page, you can find the call schedule

Corporate Bonds
Exercise 17: Yield to Call and Yield to Worst

• We’ve modified our Bond calculator used for High Grade Bonds to account for multiple call schedules
• The yield to maturity calculation is the same, the only difference is we are calculating the yield to
various call dates
• Note that this Bond has a first long coupon, we’ve adjusted the first interest payment and the
fractional period calculation to adjust for it
Part 1
1. Enter in the Call Schedule in Part 1
2. Guess and Check the Annual Yield to Call for each call date to solve for the Issue Price of 100.00%
3. Note the Yield to Worst Date (there could be more than one date with the same yield)
4. Discuss: How does the Call Price Impact your view of the Call Options?
Part 2
1. In Part 2, The bond has been traded for over a month and is now priced at $103.50. Guess and
Check the Annual Yield to Call to each call date. Note the Yield to Worst, which is the lowest yield
out of all the call dates
2. Discuss: Why does the yield to call differ in 2024 and 2027 despite the call price being the same

Corporate Bonds
Exercise 17: Bloomberg Solution

• Once you load up the bond, select YA to load
the Yield and Spread page, hit the Calls tab
and it will calculate the Yield to each call date
and the Yield to Worst
Part 1: At Issue,
par price
Part 2: On
6/24/2019 at
103.50 price


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• Cash Equities

We’ll focus on Corporate Bonds in this chapter

Money Market Fixed Rate Floating Rate Derivatives

Cash Interest Rate Swaps Foreign Exchange

Federal T-Bills Treasuries Treasury FRN Interest Rate Swaps

Agency Discount Notes Agency Agency FRNs

Municipal Commercial Paper Munis FRN, VRDOs, ARS

◽ Spreads: G, T, I, Z ◽ Credit Analysis

◽ Credit Curves ▸ Ratings and Ratios

◽ DV01 ▸ Seniority and Recovery Rates

Investment Grade Bond Conventions

Trading Fractional Trades on Spread Trades on a “Trades by

Licensed to Kevin Footer

• We can plot a yield curve, with

• In the graph to the right, each green

word in Fixed Income and we refer

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Table of Yields from GC Graph

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Building Yield Curves for Valuing High Grade Bonds

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Spreads to the Government Curve

Negative 33 bps is the US

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What does the G-Spread Represent?

• Government Bonds Advantages Government

◽More liquid (easier to trade) Same Maturity

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The T Spread versus the G Spread

• In practice, Issuers, Traders and Investors all On the Run Gov’t

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Example: Apple Corporate Bond

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The Bloomberg YA Screen

• That treasury was trading at the time of

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Executing a Corporate Bond

Bloomberg Chat with a Trader A VCON Ticket Confirms the sale

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Using DV01 on a Corporate Bond

• Imagine you are the salesperson and you wanted to

• Instead of T+55, I am going to sell it for T+54. How

• Compare the settlement amounts:

◽ At T+55, you would sell it for $1,048,650

◽ At T+54, you would sell it for $1,049,121

◽ The difference is $471, or the DV01

Licensed to Kevin Footer

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DV01, Risk on Bloomberg, Modified Duration

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Corporate Bond Spread to Swaps Both reference

• The following to spread to swaps are Corporate

• We graphed the I Spread when I 50

• In practice, Bonds are analyzed off the Corporate

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New Issue Bond Schedule

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Bond Example: Keybank 3 year Fixed

• January 24th 2019 Trade, Key Bank

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Exercise 14: T, G, I and Z Spreads