Leveraged Finance

Stephen J. Antczak, CFA, is an Executive Director at UBS. Prior to joining UBS in 2001, he was a senior strategist at Merrill Lynch, and he has also worked at the Bureau of Labor Statistics as an economist. Antczak graduated from the University of Michigan with a BA in economics and an MBA in business economics and finance. Douglas J. Lucas has been a Group Managing Director and Director of Ratings Research at Moody's Investor Service since November 2008. Prior to that, he was head of CDO Research at UBS. Lucas has a BA magna cum laude in economics from UCLA and an MBA with Honors from the University of Chicago.Frank J. Fabozzi, PhD, CFA, CPA, is Professor in the Practice of Finance and Becton Fellow at Yale University's School of Management, Editor of the Journal of Portfolio Management, and Associate Editor of the Journal of Structured Finance and the Journal of Fixed Income.

• Preface xiiiAbout the Authors xvChapter 1Introduction 1Part One: The Cash Market 2Part Two: The Structured Markets 3Part Three: The Synthetic Markets 4Part Four: How to Trade the Leveraged Finance Market 5Part Five: Default Correlation 6Part OneThe Cash Market 9Chapter 2The High-Yield Bond Market 11The Reasons Companies Are Classified as High-Yield Issuers 11Size and Growth of the Cash Market 13Types of Structures 21A Look at Ratings 22Risk and Return for Bonds 26What’s Priced In? 31How About Recoveries? 35Summary 37Chapter 3Leveraged Loans 39A Tale of Two Loans 39Introduction to Leveraged Loans 42An Overview of Loan Terms 56Loan Recovery Rates 65Loan Default Rates 73Summary 79Part TwoStructured Market 81Chapter 4Collateralized Loan Obligations 83Understanding CLOs 83Elaborations and Details 92Summary 104Chapter 5CLO Returns 105Default and Recovery Scenarios 105Distressed Loan Prices, Overflowing Triple-C Buckets, and CLO Returns 119Summary 129Chapter 6CLO Portfolio Overlap 133Collateral Overlap in U.S. CLOs 134Collateral Vintage vs. Deal Vintage 142Favorite CLO Credits 142Single-Name Risk and Tranche Protections 146Excess Overcollateralization and Excess Overcollateralization Delta 150Senior and Subordinate Excess OC Deltas 151Equity Tranches and Distressed Tranches 157Summary 157Part ThreeSynthetic Markets 159Chapter 7Credit Default Swaps and the Indexes 161What Are Credit Default Swaps? 162Who Uses Protection, and for What? 168Growth of the Market 168Marking-to-Market: SDV 01 170Credit Default Swaps Indexes 172Contrasting the LCDX and CDX Indexes 177Beta: A Study of Movement 178Summary 183Chapter 8Index Tranches 185Basic Mechanics of the Tranche Market 185Loan Tranches 195Summary 199Part FourHow to Trade the Leveraged Finance Market 201Chapter 9Recessions and Returns 203Broad Market Performance 204Sector Performance 207Performance by Rating 207Summary 210Chapter 10Framework for the Credit Analysis of Corporate Debt 211Approaches to Credit Analysis 211Industry Considerations 216Financial Analysis 220Quantitative Models 232Summary 233Chapter 11Trading the Basis 235The Basic Basis Package 236Constructing the Basic Package 236Moving Away from the Basic Model 240Adding Positive Convexity 249Negative Convexity 254A More Complex Basis Package 255Hedge Ratios for CLO Hedging 259Summary 260Chapter 12How Much Should You Get Paid to Take Risk? 263Single-Name Credit Risk 263Curve Risk 267Basis Risk 269Capital Structure Risk 274Summary 281Part FiveDefault Correlation 283Chapter 13Default Correlation: The Basics 285Default Correlation Defined 285Default Probability and Default Correlation 291Summary 309Chapter 14Empirical Default Correlations: Problems and Solutions 311Empirical Results 311Problems with Historical Default Correlations 315Proposed Solutions 318Summary 333Index 335

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