GLOSSARY

The investment world is filled with both acronyms and jargon. Unfortunately, the fixed-income universe is the worst of all as it has historically been an institutional market with its own language. We have profiled what we feel are the most relevant and important definitions below. We hope this is helpful and if there are additional questions, please feel free to reach out to us.

"Alpha" is a measurement of performance and refers to the excess return of an investment relative to the return of a benchmark index. At Gateway, alpha is a definable concept. We define and measure alpha by the yield per unit of leverage for each security. Our objective is to manage our default risk by purchasing securities exhibiting less leverage than those of the widely held indexes, while delivering a higher yield.

The Authorized Participant (“AP”) is a firm designated by an ETF issuer who creates and redeems shares of an ETF. Similar to a traditional market maker, APs provide liquidity and an orderly market.

Commonly known as bps or "bips", basis points are a financial unit of measurement used to describe the percent change of the value of financial instruments or the rate change in an index or other benchmark. One basis point is equal to 0.01% (1/100th of a percent) or 0.0001 in decimal form.

Beta refers to the performance of an ETF relative to the segment of the market it accesses. The higher the beta, the more sensitive a stock or an ETF is to market moves. The measurement is based on a neutral 1, where above 1 is more volatile, and below 1 is less volatile.

The call date is a day on which an issuer has the right to redeem a callable bond prior to the stated maturity date. The bond may be callable at par, or at a premium to par based on a schedule. The call date and related terms will be stated in a security's prospectus.

Call premium is the dollar amount over the par value of a callable debt security that is given to holders when the security is redeemed early by the issuer. High yield bonds typically will have larger call premiums than syndicated loans.

In fixed income investing, a bond's current yield is an investment's annual income from interest payments which are then divided by the current price of the security.

Because the market price of a bond may change, investors may purchase bonds at either a discount or a premium, where the purchase price of a bond affects the current yield.

If an investor buys a 6% coupon rate bond for a discount of $900 (or 90 cents on the dollar), the investor earns annual interest income of ($1,000 X 6%), or $60. The current yield is ($60) / ($900), or 6.67%. The $60 in annual interest is fixed, regardless of the price paid for the bond. On the other hand, if an investor purchases a bond at a premium of $1,100, the current yield is ($60) / ($1,100), or 5.45%. The investor paid more for the premium bond that pays the same dollar amount of interest, therefore the current yield is lower.

Default is the failure to make required interest or principal repayments on a debt instrument, whether that debt is a loan or a security. Typically defaults arise from a lack of liquidity or the inability to refinance debt. This is the main risk Gateway seeks to mitigate through active, fundamental management.

A discount occurs when a bond's price is trading below its par or face value (typically 100 cents on the dollar), with the size of the discount equal to the difference between the price paid for a security and its par value. Bonds and loans may trade at a discount for several reasons, including rising interest rates, specific credit issues or general market fear. In addition to current yield, Gateway seeks to generate capital gains on investments by purchasing bonds and loans at a discount to par with the goal of getting refinanced at par or a premium to par.

Duration is a measure the sensitivity of a bond’s or fixed income portfolio’s price to changes in interest rates. Gateway tends to create portfolios having limited duration. This is because leveraged loans have a short duration due to their base rates resetting every one to three months. Gateway purchases the majority of its bonds in the secondary market which reduces the average time to maturity. This, combined with higher coupons typically leads to a lower duration than most indices.

Earnings before interest, taxes, depreciation, and amortization (“EBITDA”) is a widely used measure of core corporate profitability. Like earnings, EBITDA is often used in valuation ratios, notably in combination with enterprise value as EV/EBITDA or in analyzing debt levels as net debt / EBITDA.

While EBITDA is sometimes called cash flow, it is not cashflow and can often be inflated by certain addbacks that the credit agreement allows for. This can make an issuer look healthier from a credit perspective than underlying cashflows may suggest.

Analyzing run rate EBITDA of an issuer is a core part of Gateway’s active fundamental credit process. Gateway typically gives credit for non-cash EBITDA adjustments only.

ETF stands for "Exchange-Traded Fund". An ETF is a type of pooled investment security that operates similarly to a mutual fund but, unlike mutual finds, they can be purchased or sold on a stock exchange like a regular stock.

Factor Models are precise financial models used by advisors that incorporate factors to define a security’s risk and returns. Some of these risk factors can include macroeconomic, fundamental, and statistical.

Gateway defines free cash flow as operating cash flow less capital expenditures.

Gateway views a company’s leverage as a proxy for default risk. Gateway calculates leverage of the underlying issuer as net debt / EBITDA. Gateway typically views net debt through the specific part of the capital structure they are investing in. This allows Gateway to consider any subordination in the capital structure.

Example: Company A has EBITDA of $200M and current cash of $50M. Total debt is $850M comprised of $500M of first lien debt and $350M of unsecured debt. Gateway would calculate net first lien leverage as ($500M - $50M) / $200M = leverage of 2.25x. Gateway would calculate net total leverage as ($850M - $50M) / $200M = leverage of 4.0x

Loan-to-value (LTV) is calculated by taking the loan amount and dividing it by the value of the issuer being borrowed against. Typically, in leveraged lending, the “value” portion of the equation is defined as the issuer’s enterprise value.

Gateway uses LTV to view the amount of subordinated capital and value that would need to be eroded for a secured bond or loan investment to be impaired.

LGD = Purchase Price (as a % of par) – Recovery Rate

Example: If Company A defaulted and the recovery rate was 60 cents on the dollar, the loss given default would be 40 cents on the dollar assuming a par purchase. However, if the investment was bought at 80 cents on the dollar, the loss given default would be 20 cents on the dollar. Note that this would not be the total loss of the investment as the coupon income is not considered.

Market adjusted debt or “MAD” is the market price of the bond or loan multiplied by the principal amount.  If an issuer has a $500 million loan that trades at $0.90 on the dollar, the MAD is $450 million. 

The maturity date refers to the moment in time when the principal of a fixed income instrument must be repaid to an investor. In both high yield and loans, it is highly unusual for the security to get to maturity. They are typically refinanced 12-18 months ahead of the maturity to avoid having the debt become a current liability on the balance sheet.

Par value, also known as nominal value, is the face value of a bond or loan stated in the credit agreement or bond indenture which is usually $1,000 (or 100 cents on the dollar).

Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments.

Pari-passu is a Latin phrase meaning "equal footing." In leveraged lending, "equal footing" means that two or more different pieces of debt would have the same collateral claim and would have similar treatment in a bankruptcy process.

Example: Company A could have issued a senior secured term loan and a senior secured bond at different points in time. However, in a liquidation or bankruptcy, both instruments would have the same claim on the Company’s assets and are said to rank pari-passu.

The primary market in leveraged finance is where an issuer sells new loans and bonds to Qualified Institutional Buyers (“QIBs”) for the first time. This would be similar to an IPO in the equity markets.

Like equites, loans and bonds will trade in a secondary market after pricing. But unlike equities that trade on exchanges, syndicated loans and high yield bonds trade over the counter through banks and broker dealers.

A qualified institutional buyer (QIB) is a class of investor that can safely be assumed to be a sophisticated investor and hence does not require the regulatory protection that the Securities Act's registration provisions give to investors. In broad terms, QIBs are institutional investors that own or manage on a discretionary basis at least $100 million worth of securities.

Recovery rate is the extent to which principal and accrued interest on defaulted debt can be recovered, expressed as a percentage of face value.

Risk comes in many forms and definitions. For debt investors, the main risks are duration, liquidity, correlation, and default. Our risk definition is on the avoidance of losing money—which we view as default-loss. We work to address risk with thorough fundamental and valuation analysis, paying close attention to leverage, liquidity, cash flow generation and capital structure sustainability.

Though stocks are one of the most commonly traded securities, there are also other types of secondary markets. For example, investment banks and corporate and individual investors buy and sell mutual funds and bonds on secondary markets.

In the event of a company's bankruptcy or liquidation, a senior security is one that ranks highest in the order of repayment before other security holders receive a payout. Senior securities are typically considered the safest offering by a company because in the event of default the senior security holders will be paid any funds owed before investors in lower ranking securities.

Yield is the current return given to investors for investing in a loan, bond, stock, or other kind of security. For fixed income instruments, the yield is a defined interest rate and is contractual. For stocks, dividend rates are a discretionary payout set by the Board of Directors.

An internal, fundamentally based relative value metric Gateway uses to measure return relative to risk. We are not looking to acquire the highest yielding securities, but more accurately the most yield with the least amount of leverage.

Example: Security A & B are two different issuers in the same industry. Security A has a Yield to Worst (“YTW”) of 7.5% with net debt / EBITDA of 3.0x. Security A would have a Yield per Unit of Leverage of 250 bps or 2.5%. Security B has a YTW of 9.0% with net debt / EBITDA of 5.0x which equates to a YTW of 180 bps or 1.8% per turn of leverage. All else equal, Gateway would prefer to invest in Security A even though it has a lower YTW.

The total internal rate of return (“IRR”) expected from the time a bond or loan is purchased to the expected date at which that bond or loan is refinanced or paid back.

Gateway typically calculates this yield from time of purchase to ~18 months prior to maturity which is when most corporations tend to deal with a refinancing.

Yield to maturity (“YTM”) is the total return anticipated on a fixed income instrument if it is held until it matures. In other words, it is the internal rate of return (“IRR”) of an investment in the security if the investor holds the instrument until maturity, with all payments made as scheduled and reinvested at the same rate.

Yield to worst is a measure of the lowest possible yield that can be received on a bond that fully operates within the terms of its contract without defaulting. It is a type of yield that is referenced when a bond has provisions that would allow the issuer to close it out before it matures – most commonly callability. A bond's YTW is calculated based on the earliest call or retirement date. It is assumed that a prepayment of principal occurs if a bond issuer uses the call option.

If a bond is trading below par value, it is common for the YTW to be the same as the YTM as most bonds will mature at par.