How do people know where debt is "trading at"
When someone says e.g. UnitedHealth's (UNH) senior debt is trading at 60 on the dollar where do they get the 60 from? Is there a way I can find that without bloomberg - such as a yahoo fin/google fin?
I don't think corporate bond interest rates are widely available, but in the context of an interview problem or something, let's say a company is restructuring and has assets of 300 w/ 200 of first lien debt and 200 of second lien debt. In the event of a liquidation, the first lien debt would receive all 200 back, so it's trading at par. The second lien debt would only receive 100/200 of their claim, thus meaning it trades at 50 cents on the dollar.
Fairly easy for corporate bonds for simplicity I’ll use fixed rated bonds, so the coupon will be fixed compared to a floater. I’ll use random numbers as I don’t have a calculator on hand.
If company A issues a 7yr bond in a low interest rate environment at a benchmark rate at 1.000% with a spread of 50bp, it would equate to a re-offer yield of 1.500%, coupons get matched almost always to the re-offer yield so it will be also 1.500%.
Now let’s say we are in a high interest and volatile market 2 years later if company x would issue a new 5yr bond they would issue at a benchmark rate 3.500% plus a spread of 100bp, which equates to a re-yield of 4.500%.
Both bonds have a remaining life of 5yr, but drastically different coupons 1.500% vs 4.500%. Naturally if one would want to buy 10m dollars of debt of company x you would buy the one with 4.500% coupon as it gives a much higher pay-off for exactly the same risk level. Hence, the value to buy the older debt is lower as the current coupons would be discounted by the current yields. So you would pay for example only 7m to get 10m of principal value of debt when it matures as over time the 7m of debt grows back to 10m (standard bond duration theory or you can think of it from a bond accounting perspective, same principle)
So, how do bankers/traders know these levels? Well the benchmark rate (UST/UKT/EUR MS) can be easily found on Bloomberg as they are extremely liquid. For corporate spreads of corporate issuers you can do the same if they are a liquid name. In case of infrequent issuers/illiquid names you often depend on traders input of what the multiple bid-ask lvls are across market makers and he’ll give you an estimation of the corporate spread of said company. You can do the math and equate it to a yield and voila you can see why some debt is trading at 60 cents on the dollar.
Source: did an off-cycle in DCM corp origination
*Wrote this on my phone
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