Salomon Smith Barney is changing its U.S. High Yield Market Index in April to accommodate the fact that the average size of junk issues has grown in recent years, and to eliminate one-off issuers active in amounts less than $200 million. Rather than include every high-yield issuer with a bond of $100 million or greater, the firm has changed the criteria so that an issuer must have a minimum of $400 million in total high yield debt outstanding, with each issue worth at least $100 million.
If the issuer has less than the minimum it can still be included in the index as long as each issue is at least $200 million. If an issuer has satisfied the $400 million minimum amount and then one of its bonds is taken out, the issuer will remain in the index. "If an issuer has four issues, each worth $100 million, and one gets tendered, we don't want to totally eliminate them because they may do another issue and the name is still liquid," says Sau-Man Kam, who helped architect the change in the index. "The whole reason for the two tier system," she adds, "is because clients don't restrict themselves to issues of only $200 million or greater, so neither should we."
As a result of these changes the number of issues in the index will fall to 864 from 1,389 and the market value of the index will also drop by $53.5 billion to $232.1 billion. In terms of sector allocation, there will be some shifts, with the telecom sector having an increased market weight of 21.2% from 17.6% and the cable sector also beefing up by 1.2% to 9.6%. The market weight for the energy sector will decrease by 1.5% to 4.4%. If Salomon hadn't added the two-tier system, allowing issuers with under $400 million in junk debt but issues greater than $200 million, many sectors would have been minimized, says Kam. She points to home builders and healthcare, in particular, where many issuers bring to market multiple deals of about $100 million.
