Valuation of Emerging Market Company Bonds

Cornerstone Research analyzed the relative value of several classes of high yield bonds issued by an emerging market company that subsequently failed.

Cornerstone Research analyzed the relative value of several classes of high yield bonds issued by an emerging market company that subsequently failed during the 1998 currency crisis. The bonds, which were issued to fund a large industrial project, had different times to maturity and different priorities in the event of bankruptcy.

The lack of adequate market comparables for each class of bonds required us to employ a contingent claims framework in which bonds of different seniority are viewed as options on the company’s underlying assets. The model we developed allowed us to quantify the difference in value of the junior bonds relative to the senior bonds while simultaneously matching the observed market value of equity.