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