Merrill raises size test for euro, Canadian high-yield indexes, cuts emerging markets sovereign threshold

New York, Oct. 14 - Merrill Lynch announced changes to its global bond indexes including an increase in the minimum size for inclusion in the euro and Canadian dollar high-yield indexes and a reduction in the threshold for emerging markets sovereigns.

In addition, the investment bank will now use Fitch Ratings' assessments in addition to Moody's Investors Service and Standard & Poor's.

Euro and Canadian bonds will now need to reach 100 million in size instead of 50 million to qualify for inclusion in their respective indexes. U.S. dollar and sterling sizes are left unchanged.

Merrill will also exclude pay-in-kind bonds from the global high-yield and global emerging markets corporate indexes but will keep them in the emerging markets sovereign indexes.

These changes will result in two securities leaving the Canada High Yield Index, cutting its total capitalization to C$3.4 billion from C$3.6 billion and 12 leaving the Euro High Yield Index, cutting its total capitalization to €51.9 billion from €52.8 billion.

For dollar and euro emerging markets sovereign indexes, the minimum size declines to 250 million from 300 million. The change brings in 16 additional issues, raising the total capitalization of the Global Emerging Markets Sovereign Plus Index to $293.9 billion from $289.4 billion.

Going forward, Merrill's indexes will now use ratings based on an average of Moody's, S&P and Fitch. Previously Moody's and S&P only were used. In Canada, Merrill will use DBRS instead of Fitch.

The rating change will affect 2,300 of the 18,818 securities in the Global Broad Market, Global High Yield and Global Emerging Markets Indexes. Most of the changes will result in a one notch upward move. No bonds move to investment grade from junk and 17 go in the other direction.

Merrill is changing its High Yield 175 Index to a rules-based index designed to "closely emulate the risk structure" of the U.S. High Yield Master II Index. The index will be renamed the High Yield 100 Index and it will have 100 issues. To be considered for inclusion, a bond must be a constituent of the High Yield Master II Index, must have at least $200 million face value outstanding, must have at least two years remaining to final maturity, must be issued by a corporation legally domiciled in the United States, Canada, the United Kingdom or an EMU member country, must have a composite rating of CCC3 or higher, must be Trace eligible and must have a dollar price of 75 or greater. Merrill will then give priority to more liquid issues. No issuer can generally have more than two bonds in the index.

Changes are also being made to the criteria for inclusion in Merrill's global sovereign indexes.

For the Global Government Bond Index II, a country must be an OECD member, have an investment-grade foreign currency long-term sovereign composite rating, have $50 billion equivalent in outstanding face value of index-qualifying debt upon entry to the index, have at least $25 billion equivalent in outstanding face value of index-qualifying debt to remain in the index, be available to foreign investors and must have at least one readily available transparent price source for its securities independent of Merrill Lynch.

For the Global Sovereign Broad Market Plus Index, a country must have an investment-grade foreign currency long-term sovereign composite rating, have $10 billion equivalent outstanding face value of index-qualifying debt, be available to foreign investors and have at least one readily available transparent price source for its securities independent of Merrill Lynch.

For the Global Government Inflation-Linked Index, the test is the same as for the Global Sovereign Broad Market Plus Index and the country must also be an OECD member.

As a result, South Korea will be added to the Global Government Bond Index II and New Zealand removed. Israel and Thailand will join the Global Sovereign Broad Market Plus Index and Hong Kong will depart. Australia and New Zealand will be excluded from the Global Government Inflation-Linked Index.

All changes are effective Dec. 31.

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