The End of the Beginning

Glenn Yago and Susanne Trimbath

in Beyond Junk Bonds

Published in print May 2003 | ISBN: 9780195149234
Published online November 2003 | e-ISBN: 9780199871865 | DOI:
The End of the Beginning

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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.

Keywords: companies; cyclical factors; decline; economic factors; economic recovery; financial distress; firms; government intervention; government regulations; high‐yield markets; industrial restructuring; regulations; restructuring; returns; structural stability; supply and demand; USA

Chapter.  5372 words.  Illustrated.

Subjects: Financial Markets

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