I have been a high yield fund manager in Europe of over twelve years, and studied High Yield with Theodore Barnhill at The George Washington University.
Maxwell & Shenkman's Leveraged Financial Markets: A Comprehensive Guide to Loans, Bonds, and Other High-Yield Instruments is a welcome update of material previously covered in the now outdated "High Yield Bonds" by Barnhill, Shenkman and Maxwell.
For buy-side high yield fund managers the ubiquitous and peripatetic Sam DeRosa-Farag and Martin Fridson were typically the sage voices of analysis, while academics such as Edward Altman championed the asset class, and Paul Asquith more cautiously demonstrated the misinterpretation of the Hickman study that started Milken's career. Gradually the asset class that would not go away and launched a billion private equity deals became the subject of wide professional and academic interest.
Contributors to this volume analyze the major high-yield products, examine alternative credit risk measurements, and outline ways to trade and manage high-yield assets. Also covered is the work out worlds of debtor-in-possession financing and distressed investing.
The battle of Moody's, Barra, and KMV is covered here, but not with the thoroughness of the folks who followed the blow-by-blow acquisition of and defense from the inside on the quantitative finance bulletin boards like Willmott and Nuclearphynance. The Moody's KMV Expected Default model is claimed to be "the most widely used quantitative credit model around the world." Quite a claim for a simple unbounded extension of the Merton-Black model of volatility and spreads on a time series, but what the heck.
The financial crisis of 2008 highlighted and called into question the competence of the nationally recognized statistical rating agencies (NSRSOs). But few know how the agencies go about their proprietary method of rating the creditworthiness of individual companies. Leveraged Financial Markets gives us a peak but naturally with a bit of caution as those fat fees for a rating pay for plenty of lawyers. It is said that confidentiality agreements from the big three for ex-employees would make the devil tremble.
Credit review typically involves both fundamental analysis and credit models. Fundamental analysis is slow and subjective, but investors demand analysis that is timely and accurate, so "quantitative risk models have gained widespread appeal and are now used to assess credit risk across a broad range of borrowers from large Fortune 500 companies to small businesses and consumers." So the book examines some of the bigger more recognized pieces on credit risk models are intended to measure the probability of default. Most fall into two categories: accounting-based, such as the Altman Z-score model, and market-based, such as Moody's KMV (a company Moody's acquired in 2002) EDF (expected default frequency) model. There are blended models as well, but most are discredited and folks tend to be almost religious about which they will play with. Most CDS's use Merton-Black-KMV approach since they are trading nearly continuously, while long term investors like pension and insurance firms take the accounting and fundamental approach. Sadly, there is a bit of non differentiation on which is useful for which and why.
Naturally, with any collected work you have to be selective. Is there stuff missing here? Yes, I would have included Asquith's paper because no one cites it enough. Work on differing equity sponsors also needs more attention (the ten-minutes after the deal closes equity cushion disappearing in a PIK is an old story, leaving only your money on the table, and famously abused by certain private equity sponsors).
But all in all, this is a good book for professionals in the field who don't want to wade through the disparate sources of all the thoughts and research presented here, or also a very good introduction and insight into the fascinating world of high yield bonds and leveraged finance for a beginner or MBA student anxious to get into the field.
