Corporate Financial Distress, Restructuring, and Bankruptcy, 4th Edition
by Edward I. Altman, Edith Hotchkiss, Wei Wang
CHAPTER 9The High‐Yield Bond Market: Risks and Returns for Investors and Analysts
“High‐yield junk bonds, they are finished.” This was not an uncommon refrain heard from various pundits on Wall Street and in Washington in the wake of the corporate default surge in 1990 and 1991 and after the bankruptcy of the market's leading underwriter of these non‐investment‐grade bonds (Drexel Burnham Lambert) and the criminal indictment of the market's leading architect, Michael Milken. We argued then (Altman 1992, 1993), and in every other subsequent instance of a major domestic or international credit crisis, that high‐yield bonds are a legitimate and effective way for firms that have an uncertain credit future to raise money. One should expect periodic times of relatively high defaults commensurate with the risk premiums that issues need to offer investors to lend money. These investors, primarily from institutions like mutual funds and pension funds, seek higher fixed income returns than are available from safer, corporate investment‐grade and government bonds.
Figure 9.1 displays the rating hierarchy of credit and default risk from the leading bond and bank loan rating agencies – Fitch Ratings, Moody's Investors Service, and Standard & Poor's. Note the now familiar distinction between the relatively safe investment grade bonds (AAA to BBB–, or Aaa to Baa3) and the more speculative, non‐investment‐grade, or high‐yield, securities (below BBB– or Baa3).
FIGURE 9.1 Major Agencies' Bond ...