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The previous chapter discussed the factors that triggered the price collapse of the high‐yield market in the USA in 1989 and 1990. This chapter turns to the question of when and how the first movers returned to the market in 1991 and renewed it from then on with an activity that far surpassed high‐yield bond issuance and performance over previous decades. Year‐by‐year data are presented on the recovery for the US market, which is discussed in detail by economic industries and sectors, and by reference to individual companies. Separate analyses are given of high‐yield bonds during the transition years of 1991, 1992, 1993, and 1994. The chapter ends by briefly discussing the developing non‐US issuance market in the 1990s.

This chapter first presents a brief history of the high‐yield securities market in the USA since the 1970s. It then discusses the etymology of the term ‘junk bonds’, and goes on to describe critical events in the high‐yield market from the period 1989–1990 – which has often been characterized as the time of the beginning of the end for the market. The next part of the chapter discusses the capital access and high‐yield financial innovations that led to the development of the high‐yield securities market from the late 1970s, giving a comparative breakdown of the distribution of the main uses of high‐yield proceeds in the periods 1983–1989 and 1990–1999, and a year‐by‐year breakdown of the use of proceeds from 1983 to 2000. Last, the junk bond situation in 2000–2002 is contrasted with that in the 1990s, giving comparative year‐by‐year data for the distress ratio, the percentage of Rule 144A (which permits private placements to be freely traded among qualified institutional buyers (QIBs)) new issues, and high‐yield default rates from 1990 to 2002; data on high‐yield supply for 2000–2002 are included.

The chapter starts by presenting a brief history of capital structure theory and research. After that it goes on to discuss the corporate finance revolution, which was catalyzed by the rise of the high‐yield securities market, and demonstrated that a company could reduce its cost of capital and raise its stock price by increasing the liquidity of its securities. Solving the capital structure puzzle – how a company divides its capital along the debt‐to‐equity continuum to support its business strategy and activities in a way that maximizes current company value – became central to the financial and business strategy in setting the leverage ratio; furthermore, substituting debt for equity has been shown to add value. The rest of the chapter discusses the high‐yield market and the real economy in light of the facts that the relationship between financial markets, complex capital structure, and economic growth has become increasingly apparent, and that the linkages between the means and methods of financing firms and the future of the economy as a whole have become increasingly clear. It ends by discussing the implications of recent developments in the high‐yield market.

This short introductory chapter provides a brief analysis of the high‐yield (junk bond) market in the USA in 2001 and 2002, discussing the multitude of influences upon it, including the September 11, 2001 terrorist attacks. It notes that any attempt to compare the impact of these attacks with previous historical events will be flawed because the combination of an act of war committed in the USA at the time of a recession has never before occurred. A table is presented that attempts to sort out the positive and negative effects of individual events and circumstances on the market for high‐yield securities, and a summary is given of the immediate damage to the credit markets in September 2001. It is suggested that there is at least anecdotal evidence of large cash positions sitting on the sidelines globally, so that any recovery could be significant.

Some of the developing (non‐US) high‐yield markets were briefly mentioned in the previous chapter, but before the development of the non‐US markets for high‐yield bonds is addressed in this chapter, the countries from which national and corporate borrowers were driven to the US markets for capital are reviewed. They represent the full spectrum of size, location, and creditworthiness, and include Argentina and Brazil (which accounted for nearly 90% of all high‐yield bonds issued in the USA by South American Corporations in the 1990s), Canada, Australia, and the UK. The next section of the chapter reviews the development of the European high‐yield market, the expansion of which peaked in 1998 but then paused (and showed a drop in returns) following the Russian crisis. Data are given contrasting the different European financial systems, and difficulties arising from the different European insolvency regimes and transnational bankruptcies are discussed. The last part of the chapter discusses the development of the Canadian high‐yield market, and the attempts made to break through into this market in Asia, which are limited by cultural taboos against bankruptcy (data are given on the different creditor rights in eight Asian countries and four South American countries).

An account and analysis is given of the largely unanticipated decline of the US high‐yield market in 1989 and 1990, and its subsequent rallying in 1991 and 1992. Structural and cyclical factors affecting the high‐yield market are discussed by looking at the economic factors that influence changes in its supply and demand, and returns: aspects addressed are the default rate on high‐yield debt, higher spreads, credit conditions, stock prices, and repayment. A test developed by Brown, Durbin and Evans (1975) is used to analyze the level and month‐to‐month changes in returns and the number of high‐yield issues from 1985 to 1991, and this shows that structural stability was not part of the landscape. In other words, the functional economic relationships between cyclical factors, credit/quality defaults, competitive market yields (etc.) that drove the high market during the 1980s changed considerably – apparently as a result of the dramatic increases in government regulatory intervention in that market – but appear to have been restored by late 1991 as the market recovered from regulatory destabilization and responded to more economic fundamentals in the marketplace. The remainder of the chapter discusses the cause and consequences of financial distress in companies, the fact that some industries are more sensitive to economic conditions than others, company restructuring for economic recovery, and challenges and opportunities in 2001 and beyond; Appendix B gives details of the technical material used in the chapter.

Case studies are presented of five high‐yield US companies and the strategies they have pursued to maximize the value of their assets, labor force, products and markets. The examples show how businesses have responded to the pressures of economic change by modifying their strategies, adopting new technologies, and changing their supply chains and distribution channels; they also show how high‐yield issuers have responded to increasing competition in both domestic and international markets. A common story appears to repeat itself throughout the case studies: in utilizing the high‐yield market, companies not only went beyond traditional sources of capital but also created functions that went beyond traditional industrial categories. The companies are placed in the historical context of their foundations to give a sense of their place in their industries and in the economy as a whole, and these histories show that innovation was not new to any of them; they are Stone Container, McCaw Cellular, Viacom Incorporated, the Chrysler Corporation, and Medco Containment Services. The last part of the chapter discusses the use of high‐yield bond financing to improve efficiency by mergers and acquisitions.

Financial innovation is the engine driving the financial system toward improved performance in the real economy. The conventional view of financial instruments is based upon the categorical distinction between debt and equity, but financial innovations have evolved less as distinct categories than as a range of financial technologies involving characteristics of both, and in the high‐yield market, innovative debt securities have emerged, which have added value by various means. During the US recession and credit crunch of 1974, many companies (especially small and medium‐sized enterprises and emerging firms) learned that capital access was no longer guaranteed on the basis of profits or success. With dramatic changes in the world economy, companies required innovative securities to provide them with the financial freedom necessary to survive and grow, to enhance their flexibility in managing the capital structure of their firms in changing times, and to finance their objectives for accomplishing corporate growth strategies. These issues are addressed in different sections of this chapter as follows: The corporate finance revolution; Financial innovation and growth; Categorizing financial innovations – an elaboration of some of the more recent and innovative financial instruments that have evolved with and from the high‐yield market; The rise of the placement market: Rule 144A – which permits private placements to be freely traded among qualified institutional buyers (QIBs); Efficiency gains from Rule 144A; Implications of the ‘aircraft carrier’ proposal – a proposal to overhaul US securities laws and reduce private placements by encouraging companies to issue stocks and bonds through public offerings; Structured finance: collateralized debt obligations; Collateralized loan obligations; and Collateralized bond obligations.

While this book was being written, the US economy hovered between recession and recovery, and the global economy remained increasingly polarized and endangered by economic stagnation, instability, and inadequate job and capital formation; in this context, extending the logic of financial innovation to new markets and assets is a significant challenge. This final chapter addresses the application of the logic and practice of high‐yield financial innovations to the future, and in doing so, recounts what has been learned in the book and discusses how the means and methods of high‐yield finance might be applied to future challenges. The first three sections of the chapter are as follows: What have we learned? Yield gaps and the role of the high‐yield market; and Toward global market development. The fourth section, Missing markets, identifies several key issues as emerging global risks to sustainable growth and the capacity of the global economy to finance its future, noting that these are the markets that financial innovations and high‐yield markets, and capital markets in general, must address; they are negative capital flows to developing and transition economies, inadequate demand growth, and the absence of middle‐class development in the developing world, and lack of markets to allocate capital adequately and efficiently for entrepreneurial markets and economic growth. The remaining sections of the chapter are as follows: Capital flows; The importance of financial infrastructure; Emerging domestic markets [EDM]; Structured finance for EDM; Environmental finance; and Intellectual capital securitization.

This chapter investigates industrial restructuring in the slow‐growing food industry in the USA, asking why an industry with a growth factor of less than 1% flourishes in a world in which companies strive for growth rates of 10% or more. It first looks at the industrial composition (sectoral distribution) of the Fortune 500 [the largest 500 companies in the US as listed by Fortune Magazine, on the basis of publicly available data], and at the industrial restructuring that occurred in the 1980s in the US economy, showing a breakdown of consumer products into cyclical and noncyclical groups. The food industry is in the noncyclical group, which increased its share of revenues while decreasing its share of companies in the Fortune 500. Other sections of the chapter look at the following: consolidation through mergers and acquisitions; financial innovations – the ability to use public markets for leveraged financing and a possibly more heavy reliance (of noncyclical companies) on high‐yield bond financing (for which evidence is presented); the financing of biotechnology for food production and the associated structural change in production; the impact of the combination of high‐yield financing and high tech in the food industry; and foreign and international influences.