JUNK BONDS

AND
BRIDGE LOANS
Advait Bhalkar – 65
Sunil Kinger – 87
Mayuresh Patil – 97
Sagar Pawar – 101
Ashish Telang – 118
JUNK BONDS
 WHAT ARE JUNK BONDS?
Standard & Poor's Moody's  Fitch  Grade  Risk 

AAA
• Junk bonds
Aaa
are AAA
technically Investment
similar to Low
regular
Low 
AA Aa AA Investment

A
bonds. A A
Investment  Medium 

BBB
• The onlyBaa
differenceBBB
is the “Credit
Investment  Quality”
Medium of

BB
its issuer.
Ba BB
Junk
High

B • Rated ‘BB’ or below due to high default Highrisk.

Junk 
B B

CCC• Also known

Caa as ‘High
CCC Yield Bonds’ or
Junk 
High

CC ‘Speculative
Ca Bonds’.
-
Junk 
High

Junk 
C - - High

DDD, DD, D Junk 

D C Default
CHARACTERISTICS OF JUNK BONDS
• Yield on Junk Bonds is generally 4-6% above
Treasuries.

• The value is affected to a greater extent than the

investment grade bonds, by the possibility of
default.

• They respond to the market conditions faster

than the regular bonds.
 WHO ISSUES JUNK BONDS?
• Fallen Angels – Companies which were previously
investment grade but have lost their credit quality.

• Rising Star – Companies whose credit quality is

improving and are on their way to becoming an
investment grade.

• Companies which are emerging from bankruptcy.

• Mergers and Acquisitions, LBOs.

 WHO BUYS JUNK BONDS?
• Individual investors with high risk appetite.

• Institutional investors.

• Fund managers as a tool for diversifying the portfolio.

• Life Insurance Companies.

• Pension funds.
 BENEFITS OF JUNK BONDS
• Junks Bonds help the emerging companies to raise capital.

• High-yield bonds do not correlate exactly with either

investment-grade bonds or stocks.

• During upmarket conditions they are capable of providing

higher returns than regular bonds.

• They act as a very important tool for diversifying the

investment portfolio.

• From the investor's viewpoint, high-yield bonds provide both

income and potential for capital gains.
JUNK BOND MARKET IN INDIA
• SEBI allowed investments in Junk Bonds in December
2007.

• But this market has still not grown in India because of the
‘Low Risk Appetite’.

• Assistance for floating Junk Bonds is required from

market makers.

• Proper regulation for junk bond markets is necessary.

• Creating of a strong investor base.

MARKET BEHAVIOR OF JUNK BONDS
• In general, secondary market bond prices move in the
opposite direction of interest rates. However, junk
bonds are less affected by interest rates than are other
bonds.

• The market behavior of junk bonds is more in tune

with overall changes in the economy, such as a
recession.

• Junk bonds tend to act more like stocks in their market

behavior than other bonds.
BRIDGE LOANS
 DEFINITION
• A short-term loan intended to provide or extend financing until a
more permanent arrangement is made.

• Typically taken out for a period of 2 weeks to 3 years and no

fixed payoff date.

• More expensive high interest rates (12–15%).

• Backed by some form of collateral such as real estate or

inventory.

• Loan-to-value (LTV) ratios generally do not exceed 65% for

commercial properties, or 80% for residential properties, based
on appraised value.
 TYPES OF BRIDGE LOANS

• Closed Bridging Loans-A closed bridge is where

all terms and conditions of both sale and
purchase on both properties have been agreed.

• Open Bridging Loans-terms have not yet been

agreed on selling one property but you are still
determined that you want to go ahead with the
purchase of the second property.
 CONTD….
• First Charge Bridging Loans- A first charge
bridging loan will replace any outstanding
Mortgage and will have a First Charge on your
property.

• Second and Third Charge Bridging Loans-if one

has already taken a loan against a property and
that there is sufficient equity in the property we
can lend on a 2nd or even a 3rd charge basis.
WHO ARE THE LENDERS OF BRIDGE LOANS?

• Most banks do not offer real estate bridge loans

because the speculative nature, risk, lack of full
documentation, and other factors, do not fit the
bank's lending criteria.

• Bridge loans are therefore more likely to come

from individuals, investment pools, and
businesses that make a practice of the higher-
interest loans.
 USES OF BRIDGE LOANS
• In Business
1. When one partner wishes to leave while another
wishes to continue the business.
Bridge loan can be used until long term finance is
made available.

2. In corporate finance, bridge loan can be used for

interim financing covering the time lag between
redemption of a bond or commercial paper issue and
replacing it with a new one.
 CONTD…
3. To carry distressed companies while searching
for an acquirer or larger investor.

4. As a final debt financing to carry the company

through the immediate period before an initial
public offering.
 CONTD…
• By Developers
A bridge loan is obtained by developers to carry a
project while permit approval is sought.

Once the project is fully entitled, it becomes

eligible for long term loans from more
conventional sources that are at lower-interest
and in a greater amount
 CONTD…
• By Real Estate (Home) buyers
Individual wants to buy new home(property) by selling old
home(property) but cant wait till old home gets sold.

Bridge loan can be used here which will pay off the mortgage
on the borrower’s existing home and make a down payment
on the new home. 

Borrower repays the bridge loan when the old home sells and
can opt for long term finance from convenient lender for new
home.
 BENEFITS DRAWBACKS
• Short term working capital • Very risky, high interest
financing can be done by rates.
bridge loan without affecting
the business operations.
• Risk of old property not
getting sold.
• Allows to Buy another house
or business property without
selling your current home or
office first.

• No Initial payments on the

bridge loan.
THANK YOU