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A Pragmatist s Guide to Leveraged Finance Credit
Analysis for Bonds and Bank Debt Robert S. Kricheff
Digital Instant Download
Author(s): Robert S. Kricheff
ISBN(s): 9780132855235, 0132855232
Edition: Hardcover
File Details: PDF, 2.82 MB
Year: 2012
Language: english
A Pragmatist’s Guide to Leveraged Finance
Credit Analysis for Bonds and Bank Debt

Robert S. K richeff

2
Vice President, Publisher: Tim Moore
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© 2012 by Robert S. Kricheff
Publishing as FT Press
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T his bo o k is so ld w ith the understanding that neither the autho r no r the publisher is
engaged in rendering legal, acco unting, o r o ther pro fessio nal services o r advice by
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Printed in the United States of America
First Printing March 2012
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3
Pearson Education Asia, Ltd.
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Library of Congress Cataloging-in-Publication Data:
Kricheff, Robert, 1963-
A pragmatist’s guide to leveraged finance : credit analysis for bonds and bank debt / Robert
Kricheff. -- 1st ed.
p. cm.
ISBN 978-0-13-285523-5 (hardcover : alk. paper) 1. Financial leverage. 2. Securities. I. Title.
HG4521.K7375 2012
332.63’23--dc23
2011049988

4
I would like to dedicate this book, with love,
to my wife and my parents, all of whom
I am blessed to have.

5
Contents

C hapter 1 Intro ductio n

C hapter 2 C o mmo n Leveraged F inance T erms

General Terms
Yield and Spread Definitions
Questions

C hapter 3 D efining the M ark et and the R atings Agencies

C hapter 4 T he Participants
The Issuers
The Sell Side
The Buy Side
Private Equity

C hapter 5 W hy Is Leveraged F inance Analysis U nique?

C hapter 6 T he M ajo r C o mpo nents o f Analysis

The Components
A Pragmatic Point on the Various Aspects of Analysis

C hapter 7 So me F eatures o f B ank Lo ans

Questions

C hapter 8 A Primer o n Prices, Yields, and Spreads

The Basics
A Few Points on Yields
A Few Points on Spreads
Bank Loan Coupons
Duration
Total Returns
Deferred Payment Bonds: Prices and Yields
A Pragmatic Point on Terminology
Questions

C hapter 9 A Primer o n Key Po ints o f F inancial Statement Analysis

EBITDA
Capital Expenditures
Interest Expenses

6
 Taxes
Changes in Working Capital
Free Cash Flow
The Balance Sheet
A Pragmatic Point on Financial Statements
Questions

C hapter 10 C redit R atio s

EBITDA/Interest Ratio
Debt/EBITDA
A Pragmatic Point on the Leverage Ratio
A Pragmatic Point on Valuations
Free Cash Flow Ratios
Changes in Working Capital
Dividends
Acquisitions
One-Time Charges
The FCF/Debt Ratio
A Pragmatic Point on Free Cash Flow
Questions

C hapter 11 B usiness T rend Analysis and O peratio nal R atio s

Business Trends
Margins and Expenses
Capital Expenditures
Questions

C hapter 12 E xpectatio ns, M o deling, and Scenario s

Sales and Revenue
A Full Model
Scenarios
A Pragmatic Point on Bank Maintenance Covenants and Expectations
Questions

C hapter 13 Structural Issues: C o upo ns

Loan Coupons
Bond Coupons
Zero and Zero-Step Coupons
How the Coupon Is Determined

7
 Modeling Changes in Coupons
Questions

C hapter 14 Structural Issues: M aturities, C alls, and Puts

Maturities
Calls
Clawback
10% Call
Cash Flow Sweeps
AHYDO
Other Bank Prepayments
Open-Market Repurchases
A Pragmatic Point on Early Refinancing of Debt
Questions

C hapter 15 Structural Issues: R ank ing o f D ebt

Ranking
Structural Subordination
Subsidiary Guarantees
Questions

C hapter 16 Key Leveraged F inance C o venants

Debt Incurrence
Defined Terms and Carve-outs
Defined Term Examples
Carve-outs
Restricted Payments
Change of Control
Asset Sale
Reporting Requirements
Other Covenants
Affirmative/Maintenance Covenants
Restricted and Unrestricted Groups
Questions

C hapter 17 Amendments, W aivers, and C o nsents

Questions

C hapter 18 M ak ing M o ney o r Lo sing It O ff o f New s E vents

8
 Scenario: An Issuer Makes an Acquisition
FastFoodCo (FFC) Facts
GoodFoodCo (GFC) Facts
Deal Facts
Scenario: The Issuer Gets Bought
Scenario: An Issuer Announces an IPO
Scenario: An Issuer Is Facing a Maturity
A Pragmatic Point on the Blended Price to Retire Debt
Questions

C hapter 19 M anagement and O w nership

C hapter 20 I’m Lo o k ing at D ebt, So W hy D o es E quity M atter?

Valuation
Monitoring Equities
Questions

C hapter 21 Value, R elative Value, and C o mparable Analysis

Questions

C hapter 22 New Issuance

C hapter 23 D istressed C redits, B ank ruptcy, and D istressed E xchanges

Claims
Classes of Claims
Subordination
Claims Arising from Bankruptcy
Valuing the Enterprise
Sale or Restructuring
Restructuring Without Bankruptcy
A Few Pragmatic Points on Bankruptcy Reorganizations
Questions

C hapter 24 Preparing a C redit Snapsho t

C hapter 25 T he Investment D ecisio n Pro cess

A Sample Investment Process
Big-Picture Items
The Company
Credit Fundamentals
Event Analysis

9
 Security Analysis
Relative Value and Return
The Decision
Some Investment Traps

C hapter 26 C lo sing C o mments

Answ ers
Index

10
Acknowledgments

For their help and advice in preparing this project, I would like to thank John Lutz of McDermott Will &
Emery LLP and Andrew N. Rosenberg of Paul, Weiss, Rifkind, Wharton & Garrison LLP. Both are great
attorneys and entertaining, to say the least. And thanks to John Kolmer, a great person and boss, whom I still
tell stories about.

11
About the Author

R o bert S. Kricheff is a Managing Director and Head of the Americas High Yield Sector Strategy for
Credit Suisse. He has more than 20 years of experience doing credit analysis. In his career he has followed
numerous industries, including media, cable, satellite, telecom, gaming, entertainment, healthcare, and energy.
He has worked with emerging-market corporate debt as well as strategy and portfolio analysis. His work has
covered investment vehicles including bonds, converts, loans, preferred stocks, and credit default swaps. He has
a BA from New York University in economics and an MSc from the University of London SOAS in financial
economics.

12
1. Introduction

What’s in this chapter:

• What the market is
• How companies become part of the leveraged finance market
• Unique aspects of leveraged finance credit analysis
• The two starting points of credit analysis
The high-yield leveraged bond and loan market is over $2.3 trillion in North America, about € 650 billion in
Europe, and $600 billion in emerging markets—and it’s still growing. Perhaps you want to manage money in
this sector, sell, trade, work as a banker, be a credit analyst, work in capital markets or credit default swaps, or
work as an advisor. Or maybe you work in the finance department of a company that issues this debt.
Whatever the case, the basic skills of credit analysis are key to being able to operate effectively.
This skill set is also exceptionally valuable for those operating in the equity markets, especially if you ever have
to focus on distressed or leveraged equities.
The market is unique. It has certain features of traditional investment-grade fixed income, but it also has the
event-driven volatility typically associated with equities. Furthermore, it has structural features within the
securities and among the participants that are unique to the leveraged market.
For these reasons, the analysis involved in evaluating these investments is unique. This book covers the major
practical aspects of doing that analysis. It does not delve into theory. Instead, it focuses on how people in these
markets work as they prepare and utilize leveraged finance credit analysis, using explanatory examples.
Although leveraged loans and bonds have been issued in several currencies, including U.S. dollars, Canadian
dollars, British sterling, and euros, the issuers are still predominantly based in the U.S. But the Eurozone and
emerging markets are growing quickly. This book primarily uses examples from the U.S. dollar markets.
The core of the market are bonds and loans issued by corporations that generally are rated below investment
grade by the major rating agencies or sometimes are never rated at all. The market encompasses a wide
spectrum of credit risk, from fairly stable BB-rated securities that are close to investment grade all the way
down to those in bankruptcy.
The companies that make up this market join the market in a few ways. Some are known as “fallen angels.”
These companies were investment-grade debt issuers, but as operations weakened or some specific event
occurred, they were downgraded and became part of the leveraged market. This happened to General Motors
for a period of time. The existence of the leveraged finance market allows these fallen angels to still have access
to public and private financing and gives first-time issuers the flexibility to finance growth projects.
Other companies issued debt that was initially rated below investment grade by the major agencies. Typically
the funding was raised for expansion or acquisition that added leverage. Leveraged buyouts are another
common way in which an issuer comes to the leveraged debt market. Usually this is where private equity firms
or individual investors add debt to buy out a company. Sometimes developmental companies issue in the debt
markets. These are fairly early-stage companies. This type of funding was key for the development of the cable
and satellite television industries and the mobile telephone industry. Many of these companies got most of
their early funding through the leveraged finance markets and probably would not have developed as quickly
without financial innovations in this market. New casinos and oil refineries have also come to this market to
be financed as start-ups. For many years, some of the stalwarts of the investment-grade market were part of the

13
below-investment-grade market. These include issuers such as Comcast and Viacom.
A company’s ability to access funding in the leveraged finance markets can be a key to survival and can lead to
great growth and job creation. Many companies that have grown dramatically were greatly helped in this
process by access to this source of debt financing:
• One company had $24 million in revenue and 225 employees when it first accessed the leveraged
finance debt market to fund expansion. By the end of 2010 it had over $300 million in revenue and
more than 800 full-time employees.
• Another company grew from about $100 million in revenue and 975 employees to $1.9 billion in
revenue and 1,700 employees.
• Yet another company first accessed the high-yield market as a leveraged buyout with $1.2 billion in
revenue. It grew 20% over 5 years and added about 900 employees.
All these companies accessed the leveraged debt markets multiple times as they grew their businesses.
Ever since Michael Milken and his team at Drexel Burnham Lambert helped the modern high-yield market
evolve, it has been a place driven by innovation and events. Few companies in the high-yield market are
stagnant or stable. Some produce steady improvements as they evolve toward investment grade, and others go
through transitions, evolving through new ventures or acquisitions. Still others may be for sale or are looking
to refinance to return capital to shareholders. Finally, some companies are struggling and may be slipping
toward default and bankruptcy. It is unlikely that any below-investment-grade companies are in a state of
equilibrium.
It is often said that for your analysis to be proven right when you buy a bond, you just need to wait to
maturity, but for your analysis to be proven right when you buy a stock, you must convince others that you
are right. This is true. Correct credit analysis in buying a bond will eventually reap the yield at which the bonds
were bought, or sometimes greater if an early takeout occurs. When you buy a stock, the only way the price
goes up is when more people become convinced that they should pay more for it than you just did.
In leveraged finance, if you buy a bond or loan and it goes along just fine and pays off at maturity, the return
usually outperforms many other assets because of the high coupon. Because of this investment’s ability to
outperform just by fulfilling its obligations, a credit analyst in this market always looks to protect his
downside in an investment and considers how things could go wrong. Therefore, when analyzing scenarios for
a credit, a good analyst must take a cynical approach and constantly ask himself how he could get hurt.
Additionally, in the interim between buying a bond/loan and its being retired, the prices can move about fairly
wildly. So an analyst must keep in mind the investment time frame within which he is working.
When doing credit analysis, you must remember that the work that is being done is heading toward a
conclusion. Your approach may vary depending on whether your goal is to decide to buy, sell, or hold a
security or to underwrite a new financing.
Analyzing these companies and their credit quality is a dynamic process. The tools described in this book are
just that—tools. No quantitative model can give a complete answer of whether a debt security for a company
will default, or whether one loan will outperform another. The tools covered in this book are used every day
and are valuable in determining a security’s value. However, making a decision about a credit involves
numerous subjective aspects. That’s what makes it much more of an art than a science.
Leveraged finance credit analysis borrows tools that are typically associated with many other fields. Some of
these tools come from traditional fixed income markets, as well as equity markets and probability and game
theory. It is often said that the leveraged finance market has characteristics of both fixed income and equity.
This fact is evident in the tools used to analyze credits in this market.

14
Credit analysis starts from two basic items:
• The first is financial liquidity. You want to analyze whether the company that is being looked at has
liquidity from cash generated by operations or elsewhere, to pay the investors interest and principal over
the life of the loan.
• The second item is asset protection. The asset value is key. If the liquidity is not there to repay the
investor in the debt, the holder of the loan or bond must look to the value of the underlying asset from
which it can be repaid. Almost all the other aspects of the credit analysis derive from these two fairly
basic ideas.
This book spends a good amount of space on a few topics. Two chapters are on financial ratios and metrics,
because these are often key determinants of credit quality and are strong tools to use when comparing the
relative value of various investment options. A significant amount of space is also devoted to structural issues
and the basics of bankruptcy analysis. Understanding these factors can be key in protecting your downside.
Understanding these issues also is critical in explaining how various investments in the same capital structure
should be valued relative to each other. One chapter gives examples of how you can use these tools to react to
breaking news events, as analysts must do every day. Some concepts, such as spreads, floating-rate notes, and
deferred pay coupons, are repeated in a few places in different ways, because new market participants often ask
about them.
When you get to the chapters on ratio analysis, modeling, and structural issues, go online and find financial
results for several companies. Read through them and try the analysis as shown in the examples in this book.
Keep in mind that nothing is a constant in the analysis of leveraged finance securities. Many examples in this
book might seem to be followed by a contradiction. It is important for you to always be aware of exceptions
to the norm. When doing credit analysis, remember that nothing is always true, and nothing is ever certain.
The volatility caused by companies in transition and the unique nature of almost every security in the market
make leveraged finance credit analysis frustrating but also challenging and fun. But you cannot become
complacent in this market. With that point in mind, I end this chapter with a great Oscar Wilde quote that is
a good creed for anyone who wants to do leveraged finance credit analysis:
To believe is very dull. To doubt is intensely engrossing. To be on the alert is to live; to be lulled into
security is to die.

15
2. Common Leveraged Finance Terms

What’s in this chapter:

• Definitions of some key terms, including common synonyms
• Terms used to describe prices and returns on debt instruments
• Key points relating to how bonds and loans trade
Like most specialties, from firefighting to neurosurgery, the leveraged finance market has its own lingo. This
chapter outlines some key terms commonly used in the market and throughout this book. Some definitions
are fairly generic to the securities business, and others are specific to or more widely used in only the leveraged
finance market.
This industry often has several synonyms for the same word. Even the market itself goes by several names:
leveraged finance, high yield, junk market. All these terms refer to the market for debt instruments that are
rated below investment grade. This chapter and book list common synonyms to make you familiar with the
various interchangeable terms that market participants often use.

General Terms
amo rtizatio n
Usually refers to the required paydown of a debt instrument. On company financial statements this refers to
the depletion of intangible assets on the balance sheet, just as depreciation refers to the same for tangible assets.

call
The right to purchase a bond or loan at a set price for a set period of time.
co rpo rate bank lo an
A loan to a company. Legally, it is not a security, but a financing. It usually takes the form of a term loan
(typically not reborrowable) or a revolver (that can be repaid and reborrowed). Other terms often used include
loan, bank debt, and syndicated loan.
co rpo rate bo nd
A loan to a company in the form of a security. Bonds are also called debentures or notes.
co venant
A rule laid out in the indentures and loan documents by which the company agrees to operate as part of the
terms of the loan or the bond. Affirmative covenants are something the company must do. This can include
items such as a requirement to report financials or a minimum cash flow. Financial covenants or
maintenance convenants are typical in bank debt and include financial tests Negative covenants typically
prevent or restrict what a company can do. They may include requirements that must be met before a dividend
is paid or more money is borrowed.
credit
Refers to the issuer of the bond or loan.

default

16
When the company that issues a bond or loan fails to make a required payment on time. A technical default
occurs when a maintenance/affirmative covenant is violated.
equity
What is left of value in a company after the debt and other obligations are subtracted from the total value.
This can also refer to a company’s common stock.
grace perio d
Most loan agreements and bond indentures have a set period of time in which they are allowed to cure a
nonprincipal default before the borrowers can accelerate and force a bankruptcy. This grace period typically is
30 days.

indenture
The legal document containing all the terms that the issuer of a bond agrees to.

interest rate
The interest that is required to be paid on the loan. This is sometimes called a coupon.

issuer
The company that issues the loan or bond.

leverage
A company’s level of debt.
LIB O R
London Interbank Offering Rate. An interest rate that is often used as the base rate for floating-rate notes.
Similar to the U.S. prime rate.
lo an bo o k /bank bo o k
Usually a summary of a new loan offering. Sometimes it is private. Generally it is a bank loan version of the
bond prospectus.

maturity
The date on which the bond or loan must be repaid. Another term for this is due date.

mo ney terms
Refers to the principal due, maturity, and interest rate. These terms typically cannot be changed during the life
of the loan or bond without agreement from all the borrowers.

par
Face value, or 100% of the principal of a note or loan.

pari passu
A Latin term meaning “without partiality.” Generally refers to two debt instruments being ranked equally.

principal
The amount owed on a loan or bond at maturity. Other terms that are often used include face value and par

17
value.

pro fo rma
A Latin term meaning “as a matter of form.” Refers to financial statements that have been adjusted for certain
assumptions such as a merger or new debt offering.

pro rata
A Latin term meaning “according to the rate.” Refers to a method of allocating something equally and
proportionally.

pro spectus
When a new bond is being issued, this is a summary document of the company’s business, recent results, and
indenture. This is one of the best documents for you to quickly get familiar with a company.

put
The right to sell a bond or loan at a set price for a set period of time.
technical default
When the company that issues a bond or loan fails to follow one of the rules under its covenants; this usually
involves the violation of an affirmative covenant in the bank loans, not a payment.

tranche
From the French for “cut” or “slice.” Refers to a portion of an investment issue. Typically used to reference the
different tiers of debt in a capital structure. For example, within one company’s capitalization, a bank loan and
a senior subordinated bond would each be referred to as a separate tranche.

Yield and Spread Definitions

spread
A commonly used measure of value. It uses the yield-to-maturity (YTM) minus some interest rate benchmark.
In the U.S. market it is usually used against a treasury bond with an equivalent maturity of the bond. In the
European market it is typically measured off a sterling, bund, or European government note. Bank loans are
typically spread off of LIBOR. This gives an idea of a bond/loan’s yield relative to other interest rate
instruments of different maturities.
spread-to -w o rst (ST W )
The same as a spread, but using the yield-to-worst (YTW). STW is usually the best tool to compare the
relative value of different bonds/loans with varying maturities.
yield-to -call (YT C )
The yield assuming that the bonds are taken out at the next call date.

yield-to -maturity (YT M )

A calculation that takes into consideration the price that is paid for the bond/loan, as well as the interest
payments and principal payments expected to be made over the life of the bond and the amount of time to
maturity. It calculates an annualized return on the investment. It assumes that cash payments are reinvested at
the same rate that the bond/loan is paying.

18
yield-to -w o rst (YT W )
A more commonly used variation of YTM. Assumes the retirement based on the call schedule with the worst
return. It really applies only when a bond/loan is being bought at a premium (a price above par) and calculates
which would be the lowest return to any possible call date.
Here are some simple and logical things to remember about bond prices and yields:
• Bonds trading below par are referred to as trading at a discount. Bonds trading above par are referred to
as trading at a premium.
• When bonds are at par, the yield is equal to the coupon.
• When bonds are at par or at a discount, the YTW and YTM are the same. When they are at a premium,
the two can differ.

T rading Parlance
When a trader gives a market, it usually is given with a bid and an ask. (This is common for most security
and loan markets.) The bid is where the trader is willing to buy, and the ask is where the trader is willing to
sell. If the market bid is 98 and the market offer is 99, it might be written like this: 98=99. If the trader is
willing to only bid on the bonds, it might be written like this: 98=. If someone accepts the bid price and
sells the bonds to the trader, the trader may say he has been hit. If someone buys the bonds from the trader,
the trader may say he has been lifted.

Let’s finish this chapter with some quick comments on trading bonds and loans.
Typically the minimum size at which a corporate bond can be traded is $1,000. However, in practice, the
minimum “round lot” trade is $1,000,000. The same is true for loans. (This is one reason why it tends to be
an institutional investor market and not an individual investor market.)
When prices are given for bonds and loans, they are typically given as a percentage of face value. For example, if
a bond is trading at 100% of face value, you would quote the price as par, or 100. If it was trading at a
discount to face value—for example, at 98 or 99—this would mean for a round lot the buyer would pay
$980,000 or $990,000. Although a percentage sign actually should be placed after these prices, in practice this
is rarely done. More commonly people mistakenly use a dollar sign.
Sometimes a price is given in yield instead. Yields are usually given as a percentage, so a 10% bond at par may
be referred to as trading at par, or at 100, or at a yield of 10%. Unless otherwise stated, this usually refers to
the yield-to-worst.
Bank loans and bonds trading at very low spreads (said to be trading tight) are frequently quoted by their
spread-to-worst rather than a percentage of par or a yield. When spreads are used, they are typically quoted in
basis points (bp). There are 100bp in 1%. So if a US$ bond is trading at 10% and the equivalent maturity
treasury is trading at 6%, the spread between the two would be 4 percentage points. But this would typically
be quoted in basis points as a “spread of 400 bp.”
Interest payments are made on specific dates, typically monthly on bank loans and semiannually on bonds. But
the bonds continue to accrue interest between the payment dates. In a typical transaction, when you buy a
bond, you pay the seller the price plus accrued interest. For example, if a bond has a 10% coupon and pays
semiannually, it pays 5% on each interest payment date. If someone bought the bond halfway between the
interest payment dates (90 days after the last coupon payment), he or she would pay the price set for the bond
plus 2.5% of accrued interest. If a bond is trading without accrued interest because it is in default, it is said to

19
be trading flat.

Questions
1. Which of the following terms does not refer to a bond?
A. Debenture
B . Note
C . Preferred
D . Subordinated note
2. A maintenance covenant is also typically known as what?
A. A negative covenant
B . A blocking covenant
C . A ratio test
D . An affirmative covenant
3. When a seven-year bond is trading at a yield-to-worst of 9%, and a seven-year treasury bond is trading at
a yield of 3%, what is the bond’s spread?
A. 13% or 1,300 bp
B . 7% or 700 bp
C . 6% or 600 bp
D . 9% or 900 bp
4. If a buyer is paying 98 for $2,000,000 par amount of bonds (with no accrued interest), how much will
she actually pay the seller?
A. $980,000
B . $1,960,000
C . $2,000,000
D . $2,980,000
5. If a bond has a 10% coupon and pays on a 360-day calendar and is selling at par (100), how much do
you pay for $1,000,000 face amount of bonds if it is 90 days since the last interest payment?
A. $1,250,000
B . $1,500,000
C . $1,025,000
D . $1,000,000

20
Other documents randomly have
different content
 When a ship of the Navy is in a port of a foreign country upon the National holiday of
that country a salute of twenty-one guns is fired at noon on that day.
In accordance with established military courtesy salutes are exchanged between officers
and between officers and enlisted men not in a military formation, nor at drills, at work,
engaged in playing athletic games or at meals, on every occasion of their meeting or
passing or being addressed by a senior, the officer who is junior in rank or the enlisted man
saluting first, and the officer senior in rank returning the salute.
When the officer or enlisted man is not bearing arms of any kind in his hands he salutes
with the right hand by bringing the hand smartly up to the visor of the cap above the right
eye, fingers closed, hand, wrist and forearm straight, palm of the hand to the left and right
forearm at an angle of forty-five degrees, and then dropping the arms to the side.
The distance within which salutes are required is that within which recognition is easy,
usually considered to be about thirty paces (twenty-five yards).
When troops of the Army, Navy and Marine Corps are reviewed by the President of the
United States or by any official or officer entitled to review them, they march past the
reviewing officer with the bands playing a suitable march, the colors and standards
saluting, officers and enlisted men rendering the marching salute and the drummers and
buglers sounding the ruffles and flourishes appropriate to the rank of the reviewing officer.
The salute with the colors and standards is made by drooping them to the front. The
marching salute for officers and enlisted men is made by turning the head and eyes toward
the person to be saluted and is known as “eyes right” or “eyes left,” depending upon
whether the position of the reviewing officer is to the right or left of the column as it
passes in review, officers also salute with the sword by bringing it up and to the front until
the hand grasping the hilt is opposite the chin and then sweeping the hand and sword
down and to the right.
Many of the regiments of the Army have distinctive marches which are played when
passing in review but no distinctive march has ever been adopted for the Army as a whole.
The march usually played by the bands of the sailor regiments of the Navy when
passing in review is “A Life on the Ocean Wave,” and that played by the bands of the
Marine Corps under the same circumstances is “Semper Fidelis,” the title of the march
being the motto of the Marine Corps.

THE NATIONAL ANTHEM

“THE STAR SPANGLED BANNER”
Written by Francis Scott Key while a prisoner on
board the British Ship Surprise during the
bombardment of Fort McHenry near Baltimore during
the War of 1812.
Oh, say, can you see, by the dawn’s early light,
What so proudly we hailed at the twilight’s last gleaming.
Whose broad stripes and bright stars, thro’ the perilous fight,
O’er the ramparts we watched, were so gallantly streaming?
And the rockets’ red glare, the bombs bursting in air,
Gave proof thro’ the night that our flag was still there.
Oh, say, does that star-spangled banner yet wave
O’er the land of the free and the home of the brave?

On the shore dimly seen thro’ the mists of the deep,

Where the foe’s haughty host in dread silence reposes.
What is that which the breeze, o’er the towering steep,
As it fitfully blows, half conceals, half discloses?
Now it catches the gleam of the morning’s first beam.
In full glory reflected now shines on the stream;
’Tis the star-spangled banner; oh, long may it wave
O’er the land of the free and the home of the brave!

And where is the band who so vauntingly swore

That the havoc of war and the battle’s confusion
A home and a country should leave us no more?
Their blood has washed out their foul footsteps’ pollution.
No refuge could save the hireling and slave
From the terror of flight or the gloom of the grave:
And the star-spangled banner in triumph doth wave
O’er the land of the free and the home of the brave.

Oh, thus be it ever when freemen shall stand

Between their loved home and wild war’s desolation;
Blest with vict’ry and peace, may the heaven-rescued land
Praise the Power that hath made and preserved us a nation.
Then conquer we must when our cause it is just,
And this be our motto: “In God is our Trust!”
And the star-spangled banner in triumph shall wave
O’er the land of the free and the home of the brave.

THE END
 INDEX
Acting Assistant Surgeon, U. S. Public Health Service, insignia
of rank, 196
Address, style of, for officers, 27
Admiral, U. S. Navy, insignia of rank, 122
Admirals’ flags:
Austria-Hungary, 60
Belgium, 56
France, 54
Germany, 60
Great Britain, 54
Italy, 56
Japan, 58
Russia, 56
United States, 52
Aiguilettes, U. S. Navy, 129
Aircraft distinguishing marks, 62
American Red Cross, uniforms and insignia, 292
Appointed officers, definition, 27
Army of Cuban Occupation Medal, 213
Cuban Pacification Medal, 213
Army, U. S., grades of officers and enlisted men, 30
Assistant Engineer, U. S. Lightship, insignia of rank, 186
Surgeon General, U. S. Public Health Service, insignia of
rank, 195
Austrian Array, uniforms and insignia, 263
Navy, uniforms and insignia, 267
Austrian war medals, 291
Aviation Corps, insignia, U. S. Navy, 115
insignia enlisted men, U. S. Navy, 146
Aviation insignia, U. S. Army, 103, 104
 uniform, U. S. Navy, officers, 115

Bandsmen’s uniforms, U. S. Navy, 138

Bathing trunks, U. S. Navy, 137
Belgian Army, uniforms and insignia, 251
Belgian war medals, 288
Belts, full dress, U. S. Army, officers, 78
Boat cloak, U. S. Navy, officers, 117
Boatswain, U. S. Coast Guard, insignia, 177
U. S. Navy, insignia, 124
“Boxer” Campaign Medal, China, 1900, 212
Branch marks, U. S. Coast Guard, 180
U. S. Navy, 142
Brassards, 105
Brigadier General, U. S. Army, insignia of rank, 80
U. S. Marine Corps, insignia of rank, 156, 157
British Army, uniforms and insignia, 227
Marines, uniforms and insignia, 225
Navy, uniforms and insignia, 218
British war medals, 285
Buttons, U. S. Army, 78, 84, 106
U. S. Coast Guard, 180
U. S. Lighthouse Service, 187
U. S. Marine Corps, 161
U. S. Navy, 128
U. S. Public Health Service, 197

Cadets, West Point, insignia of rank, 86

organization, 85
uniforms, 88
Campaign hat, origin of, 3
Cap ribbons, U. S. Coast Guard, 181
U. S. Naval Militia, 144
U. S. Naval Reserve Force, 144
U. S. Navy, 135
Cape, U. S. Army, officers, 77
 U. S. Marine Corps, officers, 155
U. S. Navy, officers, 117
Caps, U. S. Coast Guard, officers, 176
U. S. Marine Corps, officers, 152
U. S. Navy, officers, 117, 118
Captain, U. S. Army, insignia of rank, 80, 81
U. S. Coast Guard, insignia of rank, 173, 175
U. S. Lighthouse Service, insignia of rank, 183
U. S. Marine Corps, insignia of rank, 156, 157
U. S. Navy, insignia of rank, 122
Captain Commandant, U. S. Coast Guard, insignia of rank,
173, 175
Carpenter, U. S. Coast Guard, insignia, 177
U. S. Navy, insignia, 124
Certificate of Merit Medal, 209
Civil Engineers, U. S. Navy, corps insignia, 120, 121
Civil War Campaign Medal, 211
Chaplain, U. S. Navy, corps insignia, 121
Chaplain. U. S. Public Health Service, insignia of rank, 196
Chevrons, origin of, 96
for wounds, 215
U. S. Army, 95-100
U. S. Marine Corps, 164, 165
U. S. Navy, 139
War service, 215
Chief Boatswain, U. S. Navy, insignia, 124
Carpenter, U. S. Navy, insignia, 124
Engineer, U. S. Lighthouse Service, insignia, 183
Gunner, U. S. Navy, insignia, 124
Machinist, U. S. Navy, insignia, 124
of Staff, U. S. Army, flag, 60
Pay Clerk, U. S. Navy, insignia, 124
Petty Officers’ uniforms, U. S. Navy, 134, 135
Pharmacist, U. S. Navy, insignia, 124
Sailmaker, U. S. Navy, insignia, 124
China Relief Expedition Medal, 213
 Citizens’ Training Camps, 107
Clerk, U. S. Public Health Service, insignia, 197
Clerks, Field, U. S. Army, uniforms, 90
Cloak, U. S. Coast Guard, officers, 177
U. S. Marine Corps, officers, 155
U. S. Navy, officers, 117
Coast and Geodetic Survey, U. S., uniforms, 187
Coast Guard, U. S., grades of officers and enlisted men, 41
insignia, 174
Coast Guard, U. S., officers, rank and corps insignia, 173, 177
organization, 25
uniforms and insignia, 170
Cocked hat, origin of, 3
Cocked hats, U. S. Navy, officers, 117
Colonel, U. S. Army, insignia of rank, 80
U. S. Marine Corps, insignia of rank, 156, 157
Command appropriate to different grades:
U. S. Army, 44
U. S. Coast Guard, 51
U. S. Marine Corps, 49
U. S. Navy, 46
Commander, U. S. Navy, insignia of rank, 122
Commission pennant, 55
Commissioned officers, definition, 26
Congressional Medal for Philippine Service, 210
Conspicuous Gallantry Medal, Great Britain, 287
Constructors, U. S. Coast Guard, insignia of rank and corps,
173-175
Corps and rank insignia, U. S. Navy, officers, 118-128
Corps insignia, U. S. Army, 101-104
U. S. Army, officers, 81-83
U. S. Marine Corps, 158
Corps, service and rank, 17
Croix de Guerre, France, 285
Cuban Occupation Medal, 213
Cuban Pacification Medal, 213
 Customs of the Services, 306

Decorations and medals, foreign, 284

Dental officers, U. S. Navy, corps insignia, 121
Departmental insignia, U. S. Army, officers, 81-83
U. S. Marine Corps, 158, 159
Dewey Medal, 207
Distinguished Service Cross, Great Britain, 286
Distinguished Service Cross, U. S., 209
Distinguished Service Medal, Austria, 291
Distinguished Service Medal, Great Britain, 287
Distinguished Service Medal, U. S., 209
Distinguished Service Order, Great Britain, 286
District superintendent, U. S. Coast Guard, insignia of rank
and corps, 173, 175
Dress uniform, U. S. Army, enlisted men, 96
U. S. Army, officers, 70
U. S. Coast Guard, 174
U. S. Marine Corps, enlisted men, 162
U. S. Navy, enlisted men, 134, 135
Dungarees, U. S. Navy, 137

Engineer officers, U. S. Coast Guard, insignia of rank, 173,

175
Engineer of Lighthouse Tender insignia of rank, 184
U. S. Lightship, 186
Enlisted men’s uniforms and insignia, U. S. Army, 92
U. S. Coast Guard, 178-181
U. S. Marine Corps, 162-169
U. S. Navy, 133-144
Enlisted men’s uniforms and insignia, U. S. Public Health
Service, 198, 199
Enrolled women, U. S. Naval Reserve Force, 146
Ensign, U. S. Navy, insignia of rank, 122, 123
Ensigns, flags and pennants, 53
Epaulets, U. S. Army, General Officers, 78
 Evening dress uniform, U. S. Army, officers, 76
U. S. Navy, officers, 113

Facings, U. S. Army, 81, 83

Fatigue uniform, enlisted men, U. S. Army, 92
Field Clerks’ brassard, U. S. Engineers, 105
U. S. Army, uniforms, 90
Field uniform, U. S. Marine Corps, enlisted men, 162
U. S. Marine Corps, officers, 153, 154
Finger prints, U. S. Navy and Marine Corps, 146
First Assistant Engineer of Lighthouse Tender, insignia of rank,
184
First Lieutenant, U. S. Army, insignia of rank, 80, 81
U. S. Coast Guard, insignia of rank, 173, 175
U. S. Marine Corps, insignia of rank, 156, 157
First Mate, U. S. Lightship, insignia of rank, 185
First Officer of Lighthouse Tender, insignia of rank, 184
Flag officers, definition of, 56
Flag of the United States, 53
Flags, ensigns and pennants, 53
Flagship, 55
Fleet, composition of, 21
Foreign Armies and Navies, uniforms and insignia, 216
Foreign decorations and medals, 284
French Army, uniforms and insignia, 235
French Navy, uniforms and insignia, 241
French war medals, 284
Full dress uniform, U. S. Army, enlisted men, 95
U. S. Army, officers, 73
U. S. Coast Guard, 172
U. S. Marine Corps, officers, 150
U. S. Navy, officers, 113
U. S. Public Health Service, 192

General, U. S. Army, insignia of rank, 80

Geneva Cross flag, 62
German Army, uniforms and insignia, 279
Marines, uniforms and insignia, 278
Navy, uniforms and insignia, 272
German war medals, 290
Good-Conduct Medal, U. S. Marine Corps, 215
U. S. Navy, 215
Guidons, 61
Gunner, U.S. Coast Guard, insignia, 177
U. S. Navy, insignia, 124

Haitian Campaign Medal, 214

History and origin of uniform, 1
Honors and distinctions, U. S. Army and Navy, 314
Hospital flag, 62

Identification tag, U. S. Army, 106

U. S. Marine Corps, 169
U. S. Navy, 145
Indian Campaign Medal, 212
Interne, U. S. Public Health Service, insignia of rank, 196
Insignia of corps and departments, U. S. Army, 101-104
of rank, U. S. Army, enlisted men, 95-100
U. S. Army officers, 81, 83
Insignia of rank, U. S. Army officers, 79, 80, 81
West Point Cadets, 86
Iron Cross, the, Germany, 290
Italian Army, uniforms and insignia, 245
Navy, uniforms and insignia, 247
Italian war medals, 288

Japanese Army, uniforms and insignia, 258

Navy, uniforms and insignia, 261
Japanese war medals, 289

Keeper, U. S. Coast Guard, insignia, 177

Keepers, U. S. Lighthouses, insignia, 186
Khaki, origin of, 11, 12

Land forces, U. S., 17

Leggings, U. S. Army, 93
U. S. Navy, 143
Legion of Honor, France, 284
Lieutenant, U. S. Navy, insignia of rank, 122, 123
Junior grade, U. S. Navy, insignia of rank, 122, 123
Lieutenant Colonel, U. S. Army, insignia of rank, 80, 81
U. S. Marine Corps, insignia of rank, 156, 157
Lieutenant Commander, U. S. Navy, insignia of rank, 122
Lieutenant General, U. S. Army, insignia of rank, 80
Life-Saving Medal, Gold, 210, Silver, 210
Lighthouse Service, duties of, 25
U. S., grades of officers and enlisted men, 43
U. S., uniforms and insignia, 182
Line officers, U. S. Navy, corps insignia, 120, 121

Machinist, U. S. Coast Guard, insignia, 177

U. S. Navy, insignia, 124
Major General, U. S. Army, insignia of rank, 80
U. S. Marine Corps, insignia of rank, 156
Major, U. S. Army, insignia of rank, 80, 81
Major, U. S. Marine Corps, insignia of rank, 156, 157
Manila Bay Medal, 207
Marine Band, uniforms, 167-169
Marine Corps, U. S. insignia, 158
U. S. swords, 160
U. S. uniforms and insignia, 147
U. S., grades of officers and enlisted men, 40
U. S., organization and duties, 23
Marine Gunner, U. S. Marine Corps, insignia of rank, 156, 157
Master of Lighthouse Tender, insignia of rank, 184
U. S. Lightship, insignia of rank, 185
Master’s Mate, U. S. Coast Guard, insignia, 177
Mate, U. S. Navy, insignia, 125
 Medaille Militaire, France, 284
Medal commemorating Battle of Manila Bay, 207
commemorating naval engagements in West Indies
during Spanish War, 207
for Haitian Campaign, 214
of Honor, U. S. Army, 205
of Honor, U. S. Navy, 206
Medals and badges of the U. S. Government, list of, 204
Medals and decorations, foreign, 284
Medals, badges and ribbons, U. S. Government, 201
Medical officers, U. S. Army, corps insignia, 102
U. S. Navy, corps insignia, 120, 121
Mess uniform, U. S. Army, officers, 76
U. S. Marine Corps, officers, 152
Mexican Service Campaign Medal, 214
Midshipman, U. S. Navy, insignia of rank, 122
uniform and insignia, 130-133
Military Cross, Great Britain, 287
Military Medal, Great Britain, 287
Military Valor Medal, Italy, 289

National Anthem of the United States, 285, 293

Naval Constructors, U. S. Navy, corps insignia, 120, 121
Militia, flag, 57
Militia, uniforms of enlisted men, 143, 144
Reserve, flag, 56
Reserve uniforms, U. S., 144
uniforms and insignia, U. S., 108
Navy, U. S., grades of officers and enlisted men, 31
Neckerchief, U. S. Navy, 143
Nicaraguan Campaign Medal, 214
Noncommissioned officers, definition, 27
U. S. Army, chevrons, 95-100
insignia of rank. U. S. Marine Corps, 164, 165
Nurses’ uniform and insignia, 200
 Olive-drab service uniform, U. S. Army, officers, 68
U. S. Coast Guard, 178
Order of Crown of Italy, 289
Order of Francis Joseph, Austria, 291
Order of Leopold, Belgium, 288
Order of Osmanieh, Turkey, 291
Order of Savoy, Italy, 289
Order of the Golden Kite, Japan, 290
Order of the Medjidie, Turkey, 291
Order of the Rising Sun, Japan, 289
Origin and history of uniform, 1
Overcoat, U. S. Army, enlisted men, 95
U. S. Army, officers, 76
U. S. Coast Guard, officers, 177
U. S. Marine Corps, enlisted men, 164, 168
U. S. Marine Corps, officers, 154
U. S. Navy, enlisted men, 138
U. S. Navy, officers, 116
U. S. Public Health Service, officers, 195
West Point Cadets, 89

Pajamas, U. S. Marine Corps, 164

U. S. Navy, 137
Passed Assistant Surgeon, U. S. Public Health Service, insignia
of rank, 196
Pay Clerk, U. S. Navy, insignia, 125
Pay Officers, U. S. Navy, corps insignia, 120, 121
Pennants, ensigns and flags, 53
Petty officers, definition, 27
insignia, U. S. Navy, 139, 142
Pharmacist, U. S, Navy, insignia, 125
U. S. Public Health Service, insignia of rank, 196
Philippine Insurrection Campaign Medal, 212
Professor, U. S. Public Health Service, insignia of rank, 196
Professors of Mathematics, U. S. Navy, corps insignia, 120,
121
 Public Health Service, U. S. uniforms and insignia, 188

Quarantine Inspector, U. S. Public Health Service, insignia of

rank, 196
Quartermaster Clerk, U. S. Marine Corps, rank insignia, 156,
157
Corps, U. S. Army, insignia, 82
Queen Elizabeth Medal, Belgium, 288

Rank, corps and service, 17

Rank insignia, U. S. Army, officers, 79, 80, 81
U. S. Marine Corps, officers, 155-157
U. S. Navy, officers, 118-128
Rank, title and precedence, 26
Rear Admiral, U. S. Navy, insignia of rank, 122
Red Cross, American, uniforms and insignia, 292
Red Cross brassard, 105 flag, 62
Regimental standards, 58, 59
Relative rank of officers of U. S. Army, Navy, Marine Corps,
Coast Guard and Public Health Service, 29
Reserve officers’ training corps, 107
Ribbons, cap, U. S. Coast Guard, 181
U. S. Naval Militia, 144
U. S. Naval Reserve Force, 144
U. S. Navy, 135
Roumanian Army, uniforms, 283
Russian Army, uniforms and insignia, 254
Navy, uniforms and insignia, 256

Saber knot, U. S. Army, officers, 79

Sailmaker, U. S. Navy, insignia, 125
Salutes and honors for high officials, 320, 321
for the National Anthem, 316, 317
to the flag, 314
Sampson Medal, 207
Santiago Medal, 207
 Sashes, General Officers, U. S. Army, 78
Sea forces, U. S., 20
Second Assistant Engineer of Lighthouse Tender, insignia of
rank, 184
Second Lieutenant, U. S. Army, insignia of rank, 80, 81
U. S. Coast Guard, insignia of rank, 173, 175
U. S. Marine Corps, insignia of rank, 156, 157
Second Mate, U. S. Lightship, insignia of rank, 186
Senior Captain, U. S. Coast Guard, insignia of rank, 173, 175
Senior Surgeon, U. S. Public Health Service, insignia of rank,
196
Service, corps and rank, 17
Service stripes. U. S. Army, 105
U. S. Coast Guard, 180
Service stripes, U. S. Marine Corps, 166
U. S. Navy, 143
Service uniform, U. S. Army, enlisted men, 92
U. S. Army, officers, 68
U. S. Coast Guard, 175, 176
U. S. Navy, officers, 114
U. S. Public Health Service, officers, 194
Shipping Board flag, 57
Shoulder knots, U. S. Army, officers, 78
Shoulder marks, U. S. Navy, officers, 125-128
U. S. Coast Guard, officers, 176
Sleeve braid, U. S. Army, officers, 80, 81
U. S. Coast Guard, officers, 173
U. S. Lighthouse Service, officers, 183-186
U. S. Marine Corps, officers, 156
Sleeve braid, U. S. Navy, officers, 110
U. S. Public Health Service, officers, 103
Spanish War Campaign Medal, 212
Naval Medal, service other than in battle, 208
Special full dress uniform, U. S. Marine Corps, officers, 148
U. S. Navy, officers, 113
 Special meritorious Modal, service other than battle, Spanish
War, 208
Specialty marks, U. S. Coast Guard, 170, 180
U. S. Navy, 130-142
Surgeon, U. S. Public Health Service, insignia of rank, 196
Surgeon General, U. S. Public Health Service, insignia of rank,
195
Sword, U. S. Army, 79
U. S. Coast Guard, 177
U. S. Marine Corps, 160
U. S. Navy, 144
U. S. Public Health Service, 197
Sword knot, U. S. Army, 79
U. S. Coast Guard, 177
U. S. Marine Corps, 160
U. S. Navy, 129

Table of occasions, U. S. Army, enlisted men’s uniforms, 91

U. S. Army, officers’ uniforms, 65
U. S. Coast Guard, officers’ uniforms, 171, 172
U. S. Navy and Marine Corps, enlisted men’s uniforms,
133
U. S. Navy and Marine Corps, officers’ uniforms, 109-113
Table of relative rank, U. S. Services, 28
Third Lieutenant, U. S. Coast Guard, insignia of rank, 173,
175
Third Officer of Lighthouse Tender, insignia of rank, 184
Title, definition, 27

Undress uniforms, U. S. Navy, officers, 114

U. S. Marine Corps, officers, 151
Uniforms, origin and history, 1
Union Jack, U. S., 55
U. S. Army, enlisted men’s uniforms, occasions for wearing, 91
grades of officers and enlisted men, 30
officers’ uniforms, occasions for wearing, 65
 uniforms and insignia, 64
U. S. Coast and Geodetic Survey, uniforms, 187
U. S. Coast Guard, grades of officers and enlisted men, 41
U. S. Coast Guard, officers’ uniforms,
occasions for wearing, 171, 172
uniforms and insignia, 170
U. S. Guards, 107
U. S. Lighthouse Service, grades of officers and enlisted men,
43
uniforms and insignia, 182
U. S. Marine Corps, grades of officers and enlisted men, 40
uniforms and insignia, 147
U. S. Navy and Marine Corps, officers’ uniforms, occasions for
wearing, 109-113
U. S. Navy, grades of officers and enlisted men, 31
uniforms and insignia, 108
U. S. Public Health Service, grades of officers and enlisted
men, 190
uniforms and insignia, 188

Vice Admiral, U. S. Navy, insignia of rank, 122

Victoria Cross, British, 286

War Cross, France, 285

War Cross, Belgium, 288
War Cross (Distinguished Service Cross), U. S., 209
War Medal, Austria, 291
War service chevrons, 215
Warrant officers’ uniforms, U. S. Coast Guard, 177, 178
U. S. Marine Corps, 155
U. S. Navy, 124
U. S. Public Health Service, 198
Watchmen, U. S. Lighthouse Service, insignia, 186
West Point Cadets, insignia of rank, 86
organization, 85
uniforms, 88
 White uniform, U. S. Army, officers, 75
U. S. Coast Guard, officers, 176
U. S. Marine Corps, officers, 151
U. S. Navy, officers, 114
Winter service uniforms, U. S. Navy, 136
Women enrolled in U. S. Naval Reserve Force, 146
Women War Workers, American Red Cross, uniforms, 299
Wound chevrons, 215
Working uniform, enlisted men, U. S. Navy, 136

Young Men’s Christian Association, uniforms for war workers,

303

Zouave, uniform, 6

Transcriber’s Notes:

The illustrations have been moved so that they do not break up paragraphs and so
that they are next to the text they illustrate.
Typographical errors have been silently corrected.
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