High Yield Debt. Bagaria Rajay

high yield than they ever cared to know. Although we decided against calling this book “Junkanomics,” I am nonetheless grateful for Radley Horton's creativity and friendship. I am also grateful for my brother, Sanjay, and my parents, Om and Chandra, for providing me with love and encouragement to pursue life to its fullest. Last, I want to thank my editor, Thomas Hyrkiel, and the team at Wiley, for their many contributions.

      My deepest gratitude is to my wife, Rajni, and our children, Arjun and Amalie. My family encouraged me to pursue this idea despite its cost to them. I am forever grateful for their love and support. Rajni filled all the gaps in our household I created and patiently reviewed drafts of chapters, offering thoughtful feedback along the way. She is one of the smartest and most fun people I know. I could not imagine my life without her and our amazing kids, who in their natural way inspire me to be a better person. For that, I dedicate this book to my family.

      About the Author

      Rajay Bagaria has nearly two decades of experience in the high yield market. He currently serves as the President and Chief Investment Officer of Wasserstein Debt Opportunities Management, LP (“WDO”) a credit hedge fund he established in 2013 with backing from a prominent family office. From WDO's inception to June 2015, WDO was a top ranking high yield fund based on data from eVestment. 4

      Prior to founding WDO, Mr. Bagaria was a Partner and Investment Committee member of Apollo Investment Management (“Apollo”), the investment manager of Apollo Investment Corporation (“AIC”), a publicly traded business development company with over $3 billion of assets under management (AUM). At Apollo, Mr. Bagaria invested in several asset classes including senior debt, high yield bonds, mezzanine debt, and equity. He also held responsibilities related to secondary trading, investment team development, portfolio company work-outs, and the development of Apollo's energy lending and aviation investment platforms. Mr. Bagaria has been a board member of several companies including LVI Services, Inc. Generation Brands, and Playpower, Inc.

      Prior to joining Apollo, Mr. Bagaria worked as an investor for Goldman Sachs & Co.'s PIA Mezzanine Fund, the largest mezzanine debt fund globally, and as a high yield investment banker at J.P. Morgan & Co. Mr. Bagaria earned a BA degree at New York University with studies at the London School of Economics.

      Mr. Bagaria is co-founder of The Manitou School, a private elementary school located in Cold Spring, New York. He lives in Garrison, New York with his wife and two children.

      Foreword

      When, about a year ago, Rajay told me that he wanted to write a book about high yield investing, my reaction was two-fold. On the one hand, time commitment required to write a book, while managing a successful hedge fund, seemed to present a daunting challenge. On the other hand, after 20 years of practicing corporate law and handling a wide variety of leverage finance transactions, I understood that this book was long overdue. Having had to explain the very basics of high yield instruments over and over again in each transaction, I could understand how frustrating it could be to try and overcome common misconceptions, lack of knowledge, and suspicious attitudes.

      As friends and colleagues who were involved in leverage finance for many years (Rajay, on the business side and me on the legal side), both of us knew well that the high yield market was largely misunderstood. The excesses of the late 1980s and early 1990s, which resulted in prominent criminal prosecutions, as well as a commonly-held notion of high volatility and high default rates of high yield instruments, gave the high yield market a bad reputation, the reputation that we knew was undeserved. Through a thorough overview of the fundamentals of high yield instruments, filled with facts and unbiased analysis, High Yield Debt: An Insider's Guide to the Marketplace debunks these myths of excessive volatility and the inherent danger of high yield market.

      Indeed, who could have been better suited to demystify high yield investing than Rajay, who started his investment career at Goldman Sachs, continued it as one of the principals at Apollo Investment Corporation, a publicly traded business development company specializing in high and mezzanine investments, and finally ended up starting his own high yield investment fund that has been steadily generating returns far in excess of market average. And Rajay did it!

      High Yield Debt: An Insider's Guide to the Marketplace unravels the mystery of the high yield market chapter by chapter. To put the topic in perspective, the book starts with a historical background (which to me was also a fun part to read as it brought back memories of the days past). It then describes market participants, explains the economics of high yield instruments, and touches upon prevalent debt structures and pertinent legal requirements. The book then moves to demonstrate high performance levels of high yield instruments making them attractive additions to an investment portfolio. The book concludes by addressing some of the more specialized concepts, such as mezzanine investments, distressed debt, and credit hedge funds. An extensive use of charts and statistics lends High Yield Debt: An Insider's Guide to the Marketplace a necessary credibility. Yet, the book is lively written, to keep the reader entertained, while educated.

      To be sure, there have been books written about high yield investing before. However, those books addressed primarily the academia and were written in a much more scholarly fashion. I could not imagine any of those books being a desktop set or a day-to-day reference guide. High Yield Debt: An Insider's Guide to the Marketplace, on the other hand, is designed to address the needs of market participants, be it an investment manager in a family office, a young lawyer starting his or her career at a corporate law firm, or a rookie investment banker pitching a new instrument to a corporate client. This is a book that could be quickly referenced to conceptualize an investment thesis for a particular instrument or to understand a market lingo used by more seasoned professionals (for which the Glossary at the end of the book can hardly be praised enough). I would also recommend this book to CFOs of companies that are looking for efficient capital-raising techniques. Overall, the key attraction of this book is its versatility, clarity and scope, all of which could come in handy in many different situations.

      Now, more than a year after the idea of the book was first conceived by Rajay, I am still awed by the sheer amount of effort that went into its writing. Yet, I am impressed even more by the quality, breadth and depth of the final product of this monumental effort, the product that deservedly occupies a prominent place on my desk. I am confident that readers will find High Yield Debt: An Insider's Guide to the Marketplace to be an invaluable treasure trove of information about high yield markets. I am very proud to take a small part in the exciting journey that the writing of this book turned out to be. It gives me a great pleasure to congratulate Rajay on the successful completion of his valiant efforts in writing this book and encourage him to embark on new, no less ambitious ventures.

Emil BuchmanCorporate PartnerFried, Frank, Harris, Shriver & Jacobson LLP

      CHAPTER 1

      Development of the High Yield Industry

      Chapter 1 lays the groundwork necessary for understanding the U.S. corporate high yield asset class. It starts by explaining what high yield debt is and how it compares to investment grade debt, the two broad fixed income categories. The chapter then covers the importance of credit ratings before providing a short history on how the modern day, high yield market evolved. This history tells a story of market growth that was not always sound, epitomized by the early 1990s “junk bond” bubble. However, the high yield industry has grown from its experiences. Improved underwriting standards, regulatory scrutiny, and greater investor protections ultimately fostered more sustainable growth manifest in today's $2.5 trillion market. To note, terms that might be confusing or are industry jargon are highlighted in italics and included in the Glossary.

1.1 WHAT IS HIGH YIELD DEBT?

      High yield debt, often referred to simply as high yield, is debt rated below investment grade by major rating agencies such as Moody's Investor Services, Standard & Poor's (S&P), or Fitch Ratings. The highest rated debt is labeled investment grade by the rating agencies and has low risk of default or loss. This ratings category includes U.S. government bonds and the debt of large public companies such as General Electric, Microsoft, and ExxonMobil. Rating agencies label debt with below

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eVestment. Performance data (net of fees and expenses) from May 2013 to June 2015 represents a sample of 181 funds that reported their performance and fund information to eVestment as of September 14th, 2015. WDO ranked #1 on return since its inception based on this data.