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A Few Things You Should Know About High Yield Bonds (but were afraid to ask)

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This publication has been prepared by Symfonie Capital (Symfonie) for information purposes only. It is not an offer or solicitation for the purchase or sale of any financial instrument. Reasonable care has been taken to ensure that the information contained herein is not untrue or misleading, but no representation is made as to its accuracy or completeness. The views and opinions expressed in this document are those of its author(s) and do not necessarily reflect those of Symfonie. No reliance should be placed on this document for the purposes of making an investment decision. Neither Symfonie, its officers, directors, nor the author(s) of this document accept liability for any loss arising from any investor arising from any decision to rely on this document. Symfonie, its affiliates and any of its or their officers may have financial interest in any transactions, securities or commodities referred to herein. Symfonie, or its affiliates, may perform services, for, or solicit business from, any company referred to herein. This document is confidential and proprietary to Symfonie. Transmission or publication of this document without the express prior consent of Symfonie is strictly prohibited. Symfonie Capital reserves all legal rights in connection with the publication of this document. Symfonie Capital 2012.

High Yield Beats Equity in the Long Term


500 400 Index 1995 = 100 300 200 100 0
19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12

European High Yield vs. Equities

Between 1995 and 2012 European High Yield returned 377% while European Equities returned 176%.
Equities

1995 - 2012

High Yield Bonds

US High Yield vs. Equities


1200
Index 1986 = 100

1000 800 600 400 200 0


19 96 19 92 20 08 20 02 20 04 19 94 19 98 20 00 20 06 20 10 20 12 19 86 19 88 19 90

Between 1986 and 2012 US High Yield returned 1040% while US Equities returned 650%.
Source: Bloomberg, CSFB, S&P 500, DowJones Stoxx 50

1986 - 2012

High Yield Bonds

Equities
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High Yield Offers Rewards


Bond Spreads - Higher Rated
1400
Spread vs. Benchmark (bp)

1200 1000 800 600 400 200 0

High Yield and EM offer significant yield premium to BBB

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2004-2012 WE BBB BBB EM Corporates Split BBB HY

Bond Spreads - Lower Rated


4000 3500 3000 2500 2000 1500 1000 500 0 Spread vs. Benchmark (bp)

Many BB and BBB EM corporates have much better credit metrics than high yield counterparts, but offer same or better yields

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2004-2012 WE BB WE B EM BB EM B

Source: Credit Suisse, Symfonie Capital, Data through 31 December 2009


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Good credit research brings rewards over time.

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High Yield is Less Volatile Than Equities

European High Yield - 2012 - Monthly Returns


15.00% 10.00% 5.00% 0.00% -5.00% -10.00% -15.00% -20.00% -25.00%
19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12
20% 15% 10% 5% 0% -5% -10% -15% -20% -25%

European Equities - Monthly Returns

Since 1986 the US Equity Market recorded monthly declines of more than 5% 27 times versus just 6 in the case of the US High Yield Market. Since 1995 the European Equity Market recorded monthly declines of more than 5% 33 times versus just 9 in the case of the European High Yield Market.
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19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12

1995 - 2012

Source: Credit Suisse, Bloomberg, Symfonie Capital,, S&P 500

High Yield Bonds Have Built-In Recovery Potential

Bond Prices as % of Par


120% 110% 100% 90% 80% 70% 60% 50%

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06

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01

04

99

08

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10

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11 20

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03

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2000 - 2012
A Rated Bonds High Yield Bonds
Source: Credit Suisse, Symfonie Capital

Bonds are issued at face value (par). In down markets, they may trade below par. As their maturity nears bonds trend back toward par and as markets recover bonds trend back toward par. High Yield bonds may experience deeper declines, but High Yield Bonds compensate with higher long term returns. Bonds reward patient investors.
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In Recessions Stock Markets Get Hit Harder than Bond Markets


Rolling 12 Month Returns - High Yield vs. Equities
80% 60% 40% Return 20% 0%

-20% -40% -60%


19 92 19 98 20 04 19 86 20 10 20 12 19 88 19 90 19 94 19 96 20 00 20 02 20 06 20 08

High Yield

Equities

From August 2000 to February 2003 the US Equity Market declined by 44.5% and the European Equity Market declined by 58.3%. In contrast, the US High Yield Market generated a 6.9% total return while the European High Yield Market was down 13%. Since 2008 High Yield has consistently provided higher annual returns than equities. High Yield Bonds have a built in-advantage because they earn interest. Over the medium term interest payments help provide a more stable return. In contrast, equity markets are prone to sharp and long lasting down cycles.
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90% 70% 50% Return 30% 10%

Rolling 12 Month Returns - Euro High Yield vs. Equities

-10% -30% -50%

19 98

20 04

20 10

20 06

20 00

19 96

20 02

High Yield

Equities

Source: Credit Suisse, Bloomberg, Symfonie Capital, S&P 500. DowJones Stoxx 50 Private and conditional. Unauthorised distribution strictly prohibited. 2012 Symfonie Capital LTD

20 08

20 12

In Recessions Stock Markets Get Hit Harder than Bond Markets


US High Yield vs. Equities
1200
Index 1986 = 100

1000 800 600 400 200 0


19 86 19 88 19 90 19 92 19 94 20 00 20 02 20 04 19 96 20 08 20 10 19 98 20 12 20 06

Despite the global economic downturn since 2008 and the European sovereign debt crisis High Yield bonds have provided strong returns. Equities have yet to recover from the peak prior to the collapse of Lehman. High Yield bonds, in contrast, not only recovered, but have also continued to generate superior returns. High Yield bonds have two advantages over equities. First, performing High Yield bonds pay interest in good times and bad times. Second, they have a stated value with a stated maturity date.
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1986 - 2012

High Yield Bonds

Equities

500 400 Index 1995 = 100 300 200 100 0

European High Yield vs. Equities

Source: Credit Suisse, Bloomberg, Symfonie Capital, S&P 500. DowJones Stoxx 50 Private and conditional. Unauthorised distribution strictly prohibited. 2012 Symfonie Capital LTD

19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12

1995 - 2012

High Yield Bonds

Equities

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Private and conditional. Unauthorised distribution strictly prohibited. 2012 Symfonie Capital LTD