Barcap explains why 103 is the magic number for high yield issuers

Barclays Capital suggests in a report published last week that investors may be overpricing high yield bonds that contain a common partial call feature. Some one in 10 new US high yield bonds issued since the start of 2010 contain a special call at 103. This typically allows the borrower to redeem up to 10% of the original amount of the bond each year at 103% of par.

Few high yield borrowers have taken advantage of this option so far. However, Lyondell Chemical and Libbey Glass are two companies that have recently exercised the call. Barclays Capital analysts calculate that the yield to worst taking full account of this feature is 36 basis points lower than if it is ignored (as it is in Bloomberg’s yield calculator). In some cases the difference is much greater, says the report.