January 2000
Edward I. Altman, Luis Beltran
ABSTRACT
This report presents results and discussion of the investment performance of those bonds and bank loans that have
defaulted on their scheduled payments to creditors and continue trading in the public market while the issuing
firm attempts a financial reorganization. Monthly total return measures are compiled based on the Altman-NYU Salomon
Center Indexes of Defaulted Bonds and Defaulted banks Loans, as well as an index that combines bonds and loans.
These returns are compared to the total returns of common stocks and high yield corporate bonds. Returns are based
on our market-weighted indexes and presented for the past year (1998) as well as for the last twelve years (for
bonds) and three years for bank loans. We also continue to estimate the size of the distressed and defaulted debt
markets in the United States.
Nineteen ninety-eight was a very difficult year for almost all investors in distressed and defaulted securities.
The Defaulted Public Bond Index declined 26.91%, which was the largest one-year fall since the inception of the
index in 1987, surpassing the previous levels of -22.78% in 1989 and -17.08% in 1990. The Bank Loan Index fell
by 10.22% in 1998, compared with positive returns in the previous two years of this relatively new index. Finally,
the combined bond and bank loan index dropped by 17.56%. Comparative returns for the twelve-year sample period,
1987-1998, show that common stocks strengthened its number one position and high yield bonds continued in second
place. We will explore reasons and implications for this poor performance year as well as why many investment management
finds reported less severe losses or small gains.
We will also update our estimates of the size of the defaulted and distressed public and private debt markets with
the latest estimates as of August 1998 of a $78 billion (face) and $55 billion (market) aggregate. A supplement
to this report, to be published shortly, will estimate the future supply of defaulted bonds and privately place
paper for the years 1999-2001.
Altman: (212) 998-0709 ealtman@stern.nyu.edu
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