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GS $ High Yield Index GS $ HYTop Index. Rules and Methodology


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Global Credit Strategy

Credit Indices

GS $ High Yield Index™

GS $ HYTop™ Index

Rules and Methodology

Global Credit Strategy


Important disclosures appear at the back of this material.



Table of Contents


The Index Policy Committee ...1

GS $ High Yield Index™ ...1

GS $ HYTop™ Index ...3

Monthly Rebalancing…...7

Calculation Methodology...7

Index Value...9


1 The GS $ High Yield Indices – Rules & Methodology

The Index Policy Committee

The rules of the Goldman Sachs US $ High Yield Indices* are governed by the Index Policy Committee (“Committee”). The Committee is comprised of at least 50% non-Goldman Sachs members. The Committee has oversight over the formulation of the rules governing the index. Implementation of the rules is the responsibility of Goldman Sachs. The Committee’s decisions are binding.

The Committee meets at least once a year to review the rules and composition of the indices in light of changing market structure, though it also strives for continuity.

GS $ High Yield Index™

General Selection Criteria

The Goldman Sachs US $ High Yield Index™ is composed of US dollar-denominated bonds issued by corporate issuers and rated by at least one of two rating services: Moody’s Investors Service, Inc. (“Moody’s”) or Standard & Poor’s Rating Services, a division of The McGraw-Hill Companies, Inc. (“S&P”). The index composition is eligible for rebalancing once a month, after the close of business on the last business day of the rebalancing month (the “rebalancing date”). The new index composition is effective on the first business day of the next month (the “composition month”). The bonds in the US $ High Yield Index must meet the criteria described below as of the close of business five business days prior to the

rebalancing date provided that the relevant bond data can be verified, at Goldman Sach’s sole discretion, as of such date (“Bond Selection Cutoff Date”).


Denomination. Must be denominated in US dollars.

Corporate Credit. Must be corporate credit, i.e., debt instruments backed by

corporate issuers that are not secured by specific assets. Debt of governments, sovereigns, quasi-sovereigns, and government-backed or guaranteed entities is excluded.

Geographic Scope. The issuer or, in the case of a finance subsidiary, the issuer’s

guarantor, must be domiciled in the US, Canada, Bermuda, Cayman Islands, Western Europe, or Japan.

* GS $ HYTop™, GS $ High Yield Index™ and Goldman Sachs® are trademarks of Goldman,

Sachs & Co. The methodology of the GS $ HYTop™ Index is owned by Goldman, Sachs & Co. and may be covered by one or more patents or pending patent applications.



Agency Ratings. Bonds must be rated below investment grade – but not in

default – at BB+ or lower by S&P or Ba1 or lower by Moody’s as of the Bond Selection Cutoff Date to qualify.1 Split-rated (e.g., Baa3/BB+ or Ba1/BBB) issues are excluded from the index. A split-rated issue means an issue that is rated investment grade by one rating agency and non-investment grade by another rating agency. Issues rated D by S&P or that have been subject to a default press release by Moody’s cannot enter the indices; those issues in the index that are subsequently downgraded to D by S&P or subject to a default press release by Moody’s (as of the Bond Selection Cutoff Date) will be taken out of the index on the next rebalancing date. Notwithstanding this limitation, Goldman Sachs retains the discretion, but not the obligation to consider ratings changes after the Bond Selection Cutoff Date in assessing candidates for inclusion in the index. After a bond has migrated into high yield from investment grade status, it must retain that status for three months (the “stabilization period”) before it can be included in the index.

Size. The outstanding face value of a candidate bond must be greater than or equal to $200 million as of the Bond Selection Cutoff Date. Partial buybacks or add-ons will affect the outstanding face value of a candidate bond. Goldman Sachs will consider changes in the outstanding face value of a candidate bond as a result of partial or full buybacks or add-ons, provided that Goldman Sachs is aware of such changes as of the Bond Selection Cutoff Date. Notwithstanding this limitation, Goldman Sachs retains the discretion, but not the obligation to consider changes in the outstanding face value of a candidate bond after the Bond Selection Cutoff Date in assessing candidates for inclusion in the index.

Age. New issues must have first settlement dates on or before a rebalancing date to be included in the index for the next period. As of a rebalancing date, bonds must be less than five years old and have at least three years remaining to maturity. Only bonds issued after January 1, 1997, are considered.

Bond Type. Fixed coupon bonds, zero coupon bonds, step-up bonds with coupon

schedules known at issuance (or as functions of the issuer’s rating), bonds with sinking funds, medium term notes (“MTNs”), Rule 144A offerings and callable bonds are candidates for inclusion. The following instruments are excluded as candidates from the index: preferred shares, convertible bonds, bonds with other equity features attached (e.g., options/warrants), perpetual maturity bonds, floating rate notes, putables and Reg S offerings.

Bond Weighting

Bonds are weighted according to their outstanding bond market capitalization amount.

1 If a bond is part of a Medium Term Note program, and has no individual rating, the shelf rating of the


3 Subindices

The bonds comprising the subindices are a subset of the bonds in the composite indices and therefore have to pass the same eligibility tests. Bonds are assigned to specific issuer entities and industry sectors by Goldman Sachs. Also, if a bond is rated by only one agency (Moody’s or S&P), or if both agencies classify it in the same quality sector (BB, B, CCC, CC or C), it will be included in the corresponding quality sector subindex. For bonds with split ratings, the higher rating will prevail in determining quality sector inclusion.

For purposes of selecting candidates for the subindices, an “issuer” is defined by the Bloomberg ticker (i.e., all bonds sharing a ticker are attributed to a common issuer).

Base date

The base date for the index is December 31, 1998.

GS $ HYTop™ Index

The GS $ HYTop™ Index (“HYTop Index”) is a basket of 50 bonds,2 rebalanced

monthly on the rebalancing date, designed to provide a balanced representation of the US dollar high yield corporate market through some of the most liquid high yield corporate bonds available. All 50 bonds in the basket are equally price-weighted in returns (assuming same quantity of each bond).

For purposes of selecting candidates for the index, an “issuer” is defined by the Bloomberg ticker (i.e., all bonds sharing a ticker are attributed to a common issuer).

General Selection Criteria

1. Qualified Entrants. Bonds must satisfy all the conditions for inclusion in the GS

$ High Yield IndexTM.

2. Minimum Runs & Lockouts.

Minimum Run. Any bond which enters the HYTop Index must remain in the

Index for a minimum of six months, provided it maintains eligibility for the GS $ High Yield IndexTM during that period.

Lockout Period. A bond that drops out of the HYTop Index at rebalancing

faces a three-month lockout period before it can reenter the HYTop Index.

3. Disqualification. Bonds are disqualified from candidacy in the HYTop Index for

any of the following reasons:



Security Type and Issuer. US dollar denominated bonds for foreign

corporate issuers (i.e., Yankee bonds) and debt issued by Goldman Sachs Group, Inc. or any of its affiliates are excluded. Zeros and zero step-ups (GAINS) are also excluded.

Age. As of any rebalancing date, bonds must have less than 15 years remaining to maturity.

Tender Offers and Calls. Any bond subject to a firm call or tender offer in

the month immediately following the rebalancing date will be excluded, provided that Goldman Sachs is aware of such tender offer or call as of the Bond Selection Cutoff Date.

Lockout Period. A bond is disqualified if it is within a lockout period.

Minimum Potential Run. In order to satisfy the minimum run requirement, a

bond must have at least three years and six months remaining to maturity when it enters the HYTop Index.

Trading Difficulty. If after complying with the relevant rules, a bond is

selected which is hard to obtain in the market (e.g. on account of such bond being owned by very few holders) and may result in a “fail-to-deliver” situation, Goldman Sachs, in its sole discretion, may replace such bond with the bond with the next-highest liquidity score, provided the replacement bond complies with all applicable selection rules.

4. Liquidity Score. Every bond is assigned a liquidity score that approximates the

ease of transaction execution. The liquidity score is computed to four decimal places and is an additive composite of three factors:

Liquidity Score = Raw Score + Issuer Premium + Incumbency Premium

Raw Score. The Raw Score is a function of the age and size of the bond, with

parameters constructed by studying actual trader inputs. The formula reflects the fact that larger issues are more liquid but become less liquid with age.

avg age) . ) . (size) -. (

Raw Score = 15 ×ln 75 ×exp 015 ×

where size is the face amount outstanding for the bond in millions, and avg age is the face-weighted average age in years of all add-ons plus the original principal. For example, if a $1 billion face bond that is one year old had a $1 billion add-on six months ago, avg age would be 0.75 year.



Issuer Premium. Issuer Premium gives the biggest issuers in the market a higher

overall Liquidity Score. The aggregate age-adjusted debt of every issuer (size * exp(-0.15 * avg age)) is calculated, and the largest one identified (MAX). MAX Debt Adjusted Age Aggregate Issuer remium Issuer P =12× −

The bond with the highest Raw Score (of an issuer) is awarded the full Issuer Premium, and every other bond (of the issuer) is awarded a fraction of the full

Issuer Premium proportionate to the ratio of its Raw Score to the highest Raw Score of the issuer.

For purposes of computing the Issuer Premium, aggregate debt outstanding of any issuer shall include all dollar-denominated, US-issued notes and bonds.

Aggregate debt outstanding will exclude commercial paper, preferred shares and non-US debt.

Incumbency Premium. Bonds that were members of the HYTop Index in the

prior month are assigned an Incumbency Premium to their liquidity score to reflect the notion that a new entry candidate would have to outscore an incumbent by a reasonable margin of additional liquidity in order to justify the expense of the trade. All bonds from incumbent issuers are granted the following Incumbency Premium:


ent bond non-incumb avg age), . (-. bond incumbent avg age), . (-. remium P Incumbency × × × × = 15 0 exp 25 1 15 0 exp 5 2

The non-incumbent bonds from an incumbent issuer are granted a reduced premium to facilitate a potential move to a new issue from the same issuer at the next rebalancing date.

5. Market Profile. To ensure that the HYTop Index reflects the composition of the

broad high yield market, the GS $ High Yield IndexTM is profiled annually every November 1. The date was chosen because it is roughly equivalent to the end of the traditional bond-underwriting season. The broad market is segmented into index cells. The percentage par amounts outstanding in each cell of the GS $ High Yield IndexTM determine the bond allocation for the HYTop Index during the following 12 months.

The broad market is profiled across industry sector dimensions by segmenting the bonds into five baskets, which represent the following industry sectors:

Consumer Cyclical, Consumer Other, Industrials & Materials,

Telecommunication & Technology, and Utilities & Energy. The current profile is displayed in Table 1.


6 Table 1: November 1, 2005 Market Profile

Sector Bond Count

Consumer Cyclical 11

Consumer Other 12

Industrials & Materials 8

Telecommunication & Technology 11

Utilities & Energy 8

Source: Goldman Sachs Global Credit Strategy

6. Selection Process. While the Market Profile is constant for a whole year, the bonds constituting the HYTop Index are chosen at the end of every month to fill the matrix according to their liquidity scores. The qualified entrants in each cell are ranked based on their liquidity scores and chosen in descending order of liquidity subject to one-issue per issuer per cell. In the event that there are insufficient qualified entrants to fill the predetermined number of bonds in any cell, the HYTop Index is rebalanced with fewer than 50 bonds.

7. Ties in Bond Qualifications. The inclusion and exclusion criteria described above may result in the identification of candidates that equally satisfy the general selection criteria of the index. In the event that the qualified entrants for the index equally satisfy the selection criteria, Goldman Sachs shall rank the qualified entrants according to the following characteristics and in the order listed:

Incumbency, most recent issue, longest length to maturity, and alphabetical listing by CUSIP number.

8. Rule Precedence in the Selection Procedure in the HYTop Index

Rules for inclusion in the GS $ High Yield IndexTM have priority over all rules for inclusion in the HYTop Index. If a bond does not qualify for the broad index, then it cannot be a selection for the HYTop Index. Even if a bond in the HYTop Index is in its minimum run when it is disqualified from the GS $ High Yield IndexTM, it will be removed from the HYTop Index.

The rules for the Minimum Run and the Lockout Period take precedence over the other rules for the HYTop selection (specifically, the disqualification,

selection process and ties rules). Thus, a minimum run bond which is disqualified from the HYTop but which still qualifies for the broad index remains in the index. This could happen, for example, if a bond's status as a "yankee issue" changes due to a corporate merger. A locked out bond will not be selected, even if it scores high and otherwise qualifies.



All of the bonds in their minimum run will be selected, even if this results in more bonds than normally allowed in a particular sector. Furthermore, if circumstances result in multiple minimum run bonds from the same issuer in the same sector, all of the minimum run bonds will remain in that sector. Finally, if there are more minimum run bonds qualifying for a sector than would normally be allowed in the sector, all minimum run bonds will be selected, and the index will rebalance with the excess bond(s) in that sector and in the overall HYTop Index.

9. Bond weighting

Bonds are equally price-weighted in returns (assuming equal quantity of each bond).

10. Base date

The base date for the index is December 31, 1998.

Monthly Rebalancing

The composition of the indices is held constant for any given calendar month to ensure continuity during the month and to avoid changes unrelated to the price movements of the bonds.

Calculation Methodology

The GS $ High Yield IndexTM is treated as a portfolio, where each bond’s weight is equal to its market capitalization. The HYTop Index attributes the same price-weight in returns to each individual bond (assuming equal quantity of each bond).

Calculations are made on a daily basis, using mid prices3 provided by Goldman Sachs at approximately 4 p.m. Eastern Time, with reference to the market conditions prevailing at that moment.

Total Return

The components of the total return are price changes, accrued interest, coupon payments, and reinvestment income on cash flows received during the composition month.

The month-to-date total return is first computed on a daily basis for each single bond according to the following formula:

) ( ) 1 ( ) ( ) ( , 0 , 0 , 0 , 0 , 1 , 1 i i i i i i i i i A P d days r C A P A P TR MTD + × + × + + − + =



Where: = 0

P Clean (flat) mid price on the rebalancing date. If new, P0 equals the clean (flat) offer-side price on the rebalancing date.

= 1

P Clean (flat) mid price on the calculation date. If the bond is leaving the index, P1 equals the clean (flat) bid-side price on the rebalancing date.

= 0

A Accrued interest as of the rebalancing date. =


A Accrued interest as of the calculation date. =

C Coupon payment received. =

r US $ one-month LIBID rate as of the coupon payment date. =


d Day-count convention for the reference LIBID instrument.

For called or tendered bonds, Goldman Sachs shall convert the bond to cash and carry at LIBID rates through the end of the month. If a bond is called/tendered, the month to date return for that particular bond will be calculated as follows:

) ( ) 1 ( ) ( ) 1 ( ) ( , 0 , 0 , 0 , 0 ) ( ) ( , 1 ) ( , 1 ) ( i i i i i i i c c i c i c i A P d days r C A P d days r A P TR MTD + × + × + + − × + × + =

In the above formula P(c)1,i and A(c)1,iare the price and accrued interest at the time

Goldman Sachs becomes aware of the effective call/tender. r(c) refers to the one-month LIBID rate on that date and days(c) refers to the number of days that expired since then. Then, a weighted average of the individual total returns is calculated using the beginning-of-the-period market value of each bond as follows:

× = i bond i i weight TR Index MTD TR Index MTD

Where, for the GS $ High Yield Index:

× + + × = j bond j j j i i i i A P Amount Face A P Amount Face weight ) ( ) ( , 0 , 0 , 0 , 0



For the HYTop Index:

+ + = j bond j j i i i A P A P weight ) ( ) ( , 0 , 0 , 0 , 0

Index Value

All indices were set at 100 at inception on December 31, 1998. The Index Level reflects the cumulative performance of the historically active bonds in the index since inception. It is calculated by TR Index MTD Level Index Level

Index calculationdate = rebalancingdate×

Error Correction

Inaccuracies arising from the selection of constituent bonds, classification or pricing of such bonds, or errors because of technology, such as coding errors, may result in errors in the computation of the index. In case of such errors/inaccuracies, Goldman Sachs in its sole discretion may restate the index to correct such prior errors/inaccuracies in the index. In some cases, a restatement of the index may result in a material change in the price of the index. In the event that a restatement results in a material change in the price of the index, as defined by Goldman Sachs in its sole discretion, Goldman Sachs will promptly notify the Committee of the nature of the inaccuracy/error and the impact of a restatement on the price of the index prior to restating the index.


10 Copyright 2005. The Goldman Sachs Group, Inc. All rights reserved.

The data and information presented in this manual reflect the methodology for determining the composition and calculation of the GS $ High Yield™ Index and the GS $ HYTop™ Index(together, the “Indices”). This manual and the Indices are compiled and published by, and are the exclusive property of, Goldman, Sachs & Co. (“GS&Co.”).

The composition of the Indices as determined and published by GS&Co. is dispositive. This manual describes the rules and methodology used by GS&Co. in determining such composition and calculating such value. Neither this manual nor any set of procedures, however, are capable of anticipating all possible circumstances and events that may occur with respect to the Indices and the methodology for their composition, weighting and calculation. Accordingly, a number of subjective judgments must be made in connection with the operation of the Indices that cannot be adequately reflected in this manual. All questions of interpretation with respect to the application of the provisions of this manual, including any determinations that need to be made in the event of a market emergency or other extraordinary circumstances, will be resolved by GS&Co., in consultation with the Policy Committee where appropriate. GS&Co. is committed to maintaining the Indices as liquid, tradable indices that serve as the best possible benchmark for high yield bond investing. We also recognize that the detailed rules-based approach contained in the manual may not at all times be able to reflect the underlying liquidity and condition of a specific market, particularly in periods of extraordinary market volatility or rapid technological change.

Further, modifications to the methodology used to calculate the Indices, and consequently this manual, may be necessary from time to time. GS&Co. reserves the right to make such changes or refinements to the rules and methodology set forth in this manual, in consultation with the Policy Committee, as it believes necessary in order to preserve and enhance the utility of the Indices as benchmark for certain investment grade bond market performance and the tradability of the Indices. GS&Co. also reserves the right to take such action with respect to the Indices, as it deems necessary or appropriate in order to address market emergencies or other extraordinary market events or conditions. Wherever practicable, any such changes or actions will be publicly announced prior to the effective date.

The information in this manual is private and use is not intended, and should not be construed, as an offer to sell, or a solicitation of an offer to purchase, any securities or other financial instruments. We are not soliciting any action based upon this material. This material does not take into account the particular investment objectives, financial situation or needs of individual clients. Each of GS&Co. and its affiliates and their officers, directors and employees may have positions or engage in transactions in securities or other financial instruments based on, or indexed to, or otherwise related to the Indices.

GS&Co. shall not have no liability, contingent or otherwise, to any person or entity for the quality, accuracy, timeliness and/or completeness of the Indices or any data included in this manual, or for delays, omissions or interruptions in the delivery of the Indices or data related thereto. GS&Co. makes no warranty, express or implied, as to the results to be obtained by any person or entity in connection with any use of the Indices, including but not limited to the trading of or investments in products based on or indexed or related to the Indices, any data related thereto or any components thereof. GS&Co. makes no express or implied warranties, and hereby expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to the information contained in this manual, the Indices or any data related thereto. Without limiting any of the foregoing, in no event shall GS&Co. have any liability for any special, punitive, indirect, or consequential damages (including lost profits), in connection with any use by any person of the Indices or any products based on or indexed or related thereto, even if notified of the possibility of such damages. There are no third party beneficiaries of any agreements or arrangements between GS&Co. and any licensors of the Indices.


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