Junk Bonds: How High Yield Securities Restructured Corporate America

264 Pages·1990·14.39 MB·English

by  Glenn Yago

Junk Bonds
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Junk Bonds
How High Yield
Securities Restructured
Corporate America
Glenn Yago
New York Oxford
Oxford University Press
1991
Oxford University Press
Oxford New York Toronto
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Copyright © 1991 by the Oxford University Press, Inc.
Oxford is a registered trademark of Oxford University Press
All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system, or transmitted, in any
form or by any means, electronic, mechanical, photocopying
recording, or otherwise, without the prior permission of Oxford
University Press, Inc.
Library of Congress Cataloging-in-Publication Data
Yago, Glenn.
Junk bonds: how high yield securities restructured corporate
America / Glenn Yago. p. cm.
Includes bibliographical references.
ISBN 0-19-506111-X
1. Junk bonds—United States. 2. Junk bonds—United States—Case
studies. I. Title.
HG4963.Y34 1990 332.63'234—dc20 90-35876
987654321
Printed in the United States of America
on acid-free paper
Preface
This book is about one of the most important breakthroughs in the effort
by U.S. industry to restructure itself in the face of global competition: high
yield corporate securities. I will argue that in the late 1970s the color of the
biggest blue chip stocks began to fade as investment grade companies steadily
lost jobs and American industry faced a. general competitive decline. I will
show that as this was happening companies that raised funds in the junk
bond market created jobs four times faster than the economy as a whole,
experienced one-third greater growth in productivity, fifty percent faster
growth in sales, and about three times faster growth in capital spending.
But while high yield bonds—usually referred to as "junk bonds"—were
gaining popularity by reducing financial imitations on many firms, they were
also generating considerable controversy that remains unsettled at this writing.
Volatility in the stock market is accompanied by volatility in the bond
markets, and most recent issues of high yield bonds have been withdrawn
for lack of buyers. Whatever the outcome of this uncertain marketplace, the
future of the junk bond market and restructuring in general will be based
on the economic questions examined in this book and the evolving answers
in the years ahead.
In writing this book I heard a parable about the political controversy sur-
rounding such financing that had made its way around the junk bond market.
The interpretation of this baseball analogy speaks volumes about the political
vi Preface
economy of junk bonds and buyouts in our time. Imagine there was once
a baseball team with the biggest and strongest players in history. For years,
they always won. As baseball was played at that time, the sheer magnitude
of the size and girth of the players determined who would win. Suddenly,
the team started losing games. Puzzled by this turn of events, the owner went
to the manager and asked how this could happen. How had their playing
or the competition changed?
"Well, there are these new guys," said the manager. "They move fast and
throw fast balls, curve balls, and sliders."
"Okay," replied the owner, "teach your guys to hustle and how to hit
fast balls, curve balls, and sliders." Assuming that the manager could manage
and the matter of losing would end, the owner turned on his heel and left.
As the weeks went by, the team kept losing. Once again the owner ap-
proached the manager, who confessed, "I'm sorry. I've got the biggest and
strongest players. Buy they're also the dumbest players I've ever worked with.
I've tried, but they just can't learn to move fast, hit curve balls and sliders,
and compete the way the game is now being played. You've got only one
choice if you want this club to win. Go to the Commissioner and change
the rules. Slow the game down, get him to outlaw fast balls, curve balls, and
sliders."
For nearly three decades after World War II, American business played
slow, strong, and easy. Each year the largest corporations increased their
employment, share of profits and sales, and concentrated their corporate
power. By the mid-1970s, however, the great push and shove of international
trade and technological change caused the largest American businesses to
lose their competitive edge. As new foreign and domestic businesses showed
up on the business playing field to compete, major corporations that had
once relied on sheer size and strength to maintain their market share were
suddenly losing ground to smaller competitors. Some were even facing
takeover threats from companies a fraction of their size.
What corporate leaders had perceived as the preordained alignment of the
economic universe—the primacy of large, diversified, multidivisional U.S.
corporations in increasingly concentrated industries—changed. To resist that
change, companies tried to learn new management styles and strategies. Cor-
porate strategies of diversification ensued in the 1970s along with popular
management theories. Business and policy fads abounded—Q factors, Z
theories, and reaches for excellency and beyond were part of the vision to
regain competitiveness.
But competitiveness is not found gained in the pages of a book skimmed
at 30,000 feet. If anything, the theories and fads of the late 1970s and early
1980s were nothing more than part of the resistance to change, a way to ra-
tionalize a style of corpocracy that had long ceased to function properly.
In spite of this, something was working in our economy during this period,
something that would manifest itself in the robust economy and low
unemployment that the United States enjoyed later in the 1980s. Greater
Preface vii
access to credit and capital fueled an economic boom; the primary tool to
capital access was the high yield bond. Junk bonds were not a fad and, despite
some excesses, the concept behind them was fundamentally sound.
The concept behind junk bonds also represented a fundamental shift in
the concept of the purpose of our capital markets. The old days, when credit
markets were open only to investment grade companies, were also easy days.
Companies were judged on past performance. If an entity had been profitable
and nothing material had changed, then it was judged likely to continue to
be profitable. A company was not downgraded until after some significant
adverse event had occurred. Thus the American capital markets financed
American companies on the basis of their past, not their future. And therein
lies the true revolution caused by junk bonds: the concept that a company
should be judged on its potential, rather than what it has previously
accomplished.
A country that finances on the basis of past performance will never finance
the future.
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Acknowledgments
This book represents the cooperative and collaborative efforts of many peo-
ple that have supported and assisted in my research efforts over the past years.
Though very much a team effort, I accept individual responsibility for the
accuracy and representation of the facts about the junk bond market and
corporate restructuring as I have come to see them; however, the facts about
this difficult, complex, and controversial market were never simple or
straightforward to come by, analyze, or interpret. The 1980s were a period
of enormous experimentation, creativity, and trial and error innovation in
the financial and business worlds. During that period, tremendous economic
value was created in new industries and technologies at the cutting edge of
economic change. Since my research began in 1985, each new research pro-
ject brought me into contact with other analysts, researchers, and financial
and business practitioners from whom I have learned a great deal. Moreover,
I was extremely fortunate to lead an extremely talented team of researchers
that contributed to the various data and case study analyses covered in this
book.
I have also learned a great deal from other researchers and writers in this
area including Professor Edward Altman (New York University), Professor
Michael Jensen (Harvard University), Professor Gregg Jarrell (Rochester
University), Professor Robert Sobel (Hofstra University), Professor Mike
Smith (University of Nottingham), Professor Frank Lichtenberg (Columbia