Year of Award
Master of Business Administration (MBA)
College of Business & Professional Studies
investment, yield, corporation, diversified, repay
The junk bond market, for the last half-dozen years, has been a creature less of rational financial precepts than of wishful thinking, artful promotion, and, maybe even illusion and magic. The junk era's ending began with the forced departure of Michael Milken from Drexel in December, 1988.
Yet the end of the Drexel/Milken era is basically good for the beleaguered junk market: a return to reality, to logic, to sanity. Surely junk bonds had salutary effects. In enabling raiders to launch binds against major corporations it stirred ossified management to make needed reforms. With access to junk financing many non-investment grade companies prospered. By the late 1980s, junk was being used to grease deals whose chief justification was the availability of financing and the avarice of the financiers.
The current collapse of many users of junk credit doesn't mean highyield debt is bad. It just has to be managed wisely, just like any other debt. Loans have to be serviced, and that’s what the end of the easy dealing era in the 1980s is all about. Robert Campeau lies under the ruins of Allied and Federated Stores. William Farley defaulted on loans he amassed while trying to acquire West Point-Pepperell. Ralph Ingersoll's Community Newspaper empire is now owned by his former creditors. They all broke the rules and didn't get away with it.
U.S. corporations are now as lean and mean as they were during World War II. Efficiency gains during the the 1980s were the best in thirty years. However, the magnifying of leverage was stretched too far. By returning junk to its rightful place in corporate finance - as a tool for innovative companies locked out of the traditional markets - no further legislation will be necessary. The market will be smaller, less visible, and much less exciting, but still a free market.
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German, William Roger, "A Study of Junk Bonds" (1990). Theses, Dissertations, and Capstone Projects. 447.
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