The Panic of 2008
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The Panic of 2008

Causes, Consequences and Implications for Reform

Edited by Lawrence E. Mitchell and Arthur E. Wilmarth, Jr

The Panic of 2008 brings together scholars from a variety of disciplines to examine the causes and consequences of the global credit crisis, the subsequent collapse of the financial markets, and the following recession. The book evaluates the crisis in historical context, explores its various legal, economic, and financial dimensions, and considers various possibilities for reform. The Panic of 2008 is one of the first in-depth efforts to study the crisis as it was in the very earliest stage of resolution, and establishes a foundation for thinking about and evaluating current reform efforts and the likelihood of recurrence.
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Chapter 8: Defaults and Returns in the High-Yield Bond Market: The Year 2008 in Review and Outlook

Edward I. Altman and Brenda J. Karlin


8. Defaults and returns in the highyield bond market: the year 2008 in review and outlook1 Edward I. Altman* and Brenda J. Karlin** The year 2008 proved to be a difficult one for investors in high yield, with more than $50 billion in defaults, the largest dollar amount in six years, and the continuing turmoil in credit markets. Returns versus 10-year Treasuries were at their lowest historical levels, new financings ground to a halt, spreads increased to record levels, and an unprecedented 82 per cent of high-yield bonds outstanding were classified as distressed by year-end. The default rate rose to 4.60 per cent; while only 67bp above average, this was the highest rate since 2003, and significantly larger than the 0.51 per cent default rate of 2007. The fourth-quarter 2008 default rate was 2.84 per cent, the highest quarterly default rate since the third quarter of 2002. Default losses on high-yield bonds came in at 2.83 per cent, based on a weighted average recovery rate of 42.5 per cent just after default, slightly below the historical average of 45.1 per cent. The average recovery rate was elevated by the record level of distressed exchanges in 2008. The weighted average recovery on bankruptcy and payment defaults was considerably lower at 27.1 per cent, compared to 52.2 per cent for distressed exchanges. These levels are significantly lower than a year ago, when the recovery rate was at its highest level since 1987. Returns on high-yield bonds reached historically low levels, ending the...

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