Default in the Nordic high-yield bond market : a study on original issue high-yield bonds

Abstract

In this thesis, we analyze the determining factors of default in the Nordic high-yield bond market. The study is carried out on 627 original issue bonds in the period 2006 to 2014. Binary logit models are used to identify the key determinants of default, and the estimated models can be used to predict default probabilities. Our results suggest that a combination of financial ratios, certain characteristics of the issued bond, an industry variable, the size of the issuer and the firm’s distance to default (a volatility-adjusted measure of leverage) are the best estimates for predicting default. Further, we use the determining factors of default to answer the open question of how the probability of default changes over the lifetime of the bonds. By applying a flexible econometric method, the Cox proportional hazard model, we study the bonds’ default behavior from the moment of issuance. Unique to our study is that we allow for the underlying risk of default to differ depending on the type of bond. We find that callable and convertible bonds do not age well compared to bonds without these embedded options. Default rates for callable and convertible bonds are found to increase with time after issuance, and a significant increase in default risk is observed after three years.