Beyond Junk Bonds: Expanding High Yield Markets

Beyond Junk Bonds: Expanding High Yield Markets

Beyond Junk Bonds: Expanding High Yield Markets

Beyond Junk Bonds: Expanding High Yield Markets

Synopsis

Since financial myths exploded in the 1980s, the perspective of time creates a unique opportunity to update and expand the analysis begun in Glenn Yago's 1991 book, Junk Bonds: How High Yield Securities Restructured Corporate America (Oxford University Press). At the time of its publication, Junk Bonds drew controversial responses from the Federal Reserve and government agencies. In retrospect, the evidence clearly casts favorable light on the role of high yield securities. The research presented here demonstrates how financial innovations enabled capital access for industrial restructuring, capital and labor productivity gains, and improved global competitiveness. Enough time has now passed to allow this dispassionate empirical analysis to shear away the hype and hysteria that surrounded the Wall Street scandals, Washington controversies, and media frenzy of the time. Beyond Junk Bonds provides a one-stop data, reference and case study presentation of the firms and securities in the contemporary high yield market and the financial innovations that spurred growth in the nineties and will continue to finance the future. The high yield market incubated successive waves of financial technologies that now proliferate beyond junk bonds to all the dimensions and dynamics of global debt and equity capital markets. It charts the recovery of the market in the 1990s, the recent wave of fallen angels, distressed credits and defaults, and suggests how the high yield market will be recreated in the global market of the 21st century. It explicates the linkages between the high yield market, and other credit and equity markets in managing a firm's capital structure to execute its business strategy. The weakening of the U. S. economy in 2001 and the huge shock to Wall Street from the terrorist attacks of September 11 witnessed a historic increase in the yield to maturity of high yield bonds. Despite the volatility in the flow of funds to high yield mutual funds and occasionally sharp increases in non-investment grade debt yields, the asset class has been one of the best performing fixed income investments of the past decades. In fact, high yield bonds offer an attractive risk-reward ratio competitive with more traditional asset classes. Anyone active in corporate finance, financial institutions and capital markets will find this book a must read for interpreting and understanding the recent history both of the high yield marketplace and its interaction with private equity, public equity, and fixed income markets.

Excerpt

When Junk Bonds: How High Yield Securities Restructured Corporate America was published by Oxford University Press in 1991, the high yield market had entered a period of great uncertainty. the stock market had crashed; Congress took away the tax deduction for interest paid on high yield bonds; savings and loan associations, as well as most insurance companies and pension plans, were prohibited from investing in high yield bonds; Drexel Burnham Lambert went out of business; and securities regulators, tax authorities, courts, and even economists were debating whether "junk bonds" were debt or equity. Following all of this negative news, the global economy was entering what would turn out to be one of the longest, most robust expansions in memory. More than ten years later, as Beyond Junk Bonds goes to press, another period of possibly even greater uncertainty lies ahead of us; uncertainty compounded and added to by the terrorist attacks of September 11, 2001, and the specter of a global recession that was already under way but that could only be exacerbated by the economic impact of the attacks and subsequent military actions. By June 2002, market uncertainty was indicated by a record negative return spread for high yield bonds over 10-year Treasuries that reached 1000 basis points and since narrowed to 800 basis points by November 2002. Furthermore, the level of defaulted debt bolted to $64 billion at year end 2001. By mid-2002, the defaulted debt in the speculative grade bond market already stood at $45.6 billion, not including the WorldCom default in July 2002 of $31.0 billion. Nevertheless, signs of resiliency in the high yield market, as we detail later in this volume, are beginning to appear as distressed turnarounds, restructurings, and refinancings are underway.

This book is the story of what happened in between. It is a success story, by and large—the story of the success of the market for high yield securities and the companies, industries, and even sovereign nations that used the expanded access to capital provided by the high yield market to grow and prosper. It is the story of how high yield securities moved beyond being called "junk." This book is, in fact, more than just a "story." a story could be told largely in chronological order. a topic as broad as "high yield markets" defies attempts at blow-by-blow coverage. Indeed, there are multiple time lines at work.

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