Journal of
Corporate
Renewal
July/Aug
2017
our entire sample of defaulted bonds:
( 1) from default to emergence, ( 2) from
default to 12 months post-default,
( 3) from default to 24 months post-default, and ( 4) from the 12-24 months
period. These results are shown for
both the entire 30-year sample period
and for the most recent 10 years.
We can observe from Figure 3
that the annualized average rate
of return for all bonds (1987-2016)
was 11.08 percent per year. This
compares with 25. 34 percent per
year for the more recent 10-year
period (2006-2016). Even when
excluding the 38 energy company
issues that concluded their Chapter
11 restructure periods in 2015-2016,
these results change very little.
If an investor purchased our entire
sample of defaulted bonds at default
and held them for 12 or 24 months,
the average annualized returns were
8.49 percent for 12 months and 13.58
percent for 24 months on just those
bonds that lasted for those intervals
for the entire 30-year sample period.
For the most recent 10-year sample
period, the annualized returns were
26. 20 percent for 12 months and 19.92
percent for 24 months. Many of the
more recent samples were prepackaged
or prearranged Chapter 11s
that lasted less than 12 months, and
the results were annualized for the
one and two years compilations.
Volatility of
Defaulted Bond Returns
In general, returns appear to be quite
impressive for investing in a broad,
diversified portfolio of defaulted
bonds. However, while average
annual returns are high, there is a
considerably high “cost” in terms
of volatility, as measured by the
standard deviation in price change
among the issues that comprise our
portfolios’ returns. Investors must
understand that distressed debt in
general and especially defaulted
bonds have exceptionally high
variability of their returns. We can
observe this high volatility in our
bond sample for all periods, but see
lower volatility for defaulted loans.
FIGURE 5: DEFAULTED CORPORATE BONDS BY SENIORITY (1987-2Q 2016)
DEFAULT TO EMERGENCE
Avg. Px at Default Issues Avg. Px at Emerge. Issues Avg. Months in Default Avg. Annual Px Change St. Dev.
SeniorSecured 48.81 335 55.26 236 22 6.92% 66.93%
SeniorUnsecured 37.07 925 53.96 631 28 17.39% 68.87%
JuniorSubordinated 28. 46 402 26.71 287 32 - 2.35% 75.61%
DiscountedBonds 23.06 59 29.91 33 22 14.90% 74.22%
DEFAULT TO O THER TIME PERIODS
Avg. Px 12 mo.
Post Default Issues Avg. Px Change 1-12 mo. St. Dev.
Senior Secured 53.09 176 8.76% 61.27%
Senior Unsecured 43.87 496 18.34% 93.42%
Junior Subordinated 25. 37 241 - 10.85% 66.49%
Discounted Bonds 19.53 32 - 15.29% 55.65%
Avg. Px 24 mo.
Post Default Issues Avg. Px Change 12-24 mo. St. Dev. Avg. Px Change 1-24 mo. St. Dev.
Senior Secured 56.38 85 6.21% 39.13% 7.48% 40.67%
Senior Unsecured 56.35 259 28.46% 52.03% 23.30% 39.20%
Junior Subordinated 25.59 130 0.86% 58.28% - 5.17% 44.52%
Discounted Bonds 27. 22 13 39.33% 101.22% 8.64% 58.37%
70
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40
30
20
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FIGURE 4: DEFAULTED CORPORATE BOND AVERAGE PRICING TRENDS BY SENIORITY (1987-2Q 2016)
SENIOR SECURED
SENIOR UNSECURED
SUBORDINATED
DISCOUNT/ZERO CPN
NUMBER OF MON THS POS T DEFAULT
15 23 22 21 20 19 18 17 16 1314 12 24 3 11 10 9 8 7 6 5 4 1 2 0
Average Bankruptcy period was 28 months.
335
Issues
925
Issues
402
Issues
59
Issues
85
Issues
259
Issues
130
Issues
13
Issues
Source: Altman/Kuehne NYU Salomon Center Defaulted Bond Index Database
Source: Altman/Kuehne NYU Salomon Center Defaulted Bond Pricing Database