The junk jumps are the nickname given to the the United States with the obligations which are classified like “speculative” by the credit rating agencies, i.e. those whose financial Notation is lower than the investment rank :

The correct name and polished these obligations is High-yield debt , “obligations high-output”. In current American, junk wants to say “refuse”, with a use close of our “to shit”.

In French, one also speaks about rotted obligation .

Economic logic

The existence of a separate but active market of these obligations comes from two characteristics of the American financial system:
  • the recourse to the lifting of funds directly on the markets of capital is frequent at large American SME since the end of the year 1970, much more than in Europe, where the financing of this type of companies remains carried out primarily by the Banque S;
  • in parallel, of many institutional investors has, by an internal or external regulation, prohibition to hold credits which are not classified investment rank .

For the transmitters, this type of financing is cheaper than a banking Emprunt.

Origin

For a long time, the emissions of high yield debt were not opened with the public, but were not cut to measure for institutional investors like insurance companies, via what is called a private placement. The junk jumps themselves appeared in 1977 when the Banque of investment Bear Stearns organized the first public placement of an obligation emitted by a transmitter of notation lower than the investment rank (1).

Growth

They quickly made very important great strides. As of 1983, they represented a third of incur obligation S emitted by the whole of the American private companies (1). They are used in particular at the time of generalization of the operations as LBO, of which they ensure approximately 25% of the financing. The Bank of investment Drexel Burnham Lambert, whose department High-yield was directed since 1973 by Michael Milken, called the junk jump king , there was particularly active throughout the decade.

Crisis of 1989

The market of the junk jumps underwent an serious attack - of indigestion could one say - in 1989, following the defect of several transmitters. Between the beginning of the year and the autumn 1989, the average output of the junk jumps (2) passes from 450 basic points to the top of that of the Government loans American to more than 1,000 basic points (i.e. 10% of Annual percentage rate) above that of the aforesaid Government loans. This increase of 550 basic points of Spread of credit corresponds to a fall 20% of the prices of the loans.

Drexel had to repurchase considerable quantities of obligations to dissatisfied investors, which ended up causing its bankruptcy in 1990.

The crisis of 1989 had important consequences for the LCL, whose subsidiary company took the control of Executive Life with a principal aim to precisely take again the wallet of junk jumps of this Californian insurer fallen in bankruptcy because of depreciations on this wallet.

Crisis of 2001

At the time of the combined effects: the junk jumps knew a movement of Spread of credit during the autumn and the winter 2001 equivalent with that of 1989.

Bonds

Notes

  • (1) Source:
  • (2) Way of calculating: index Merrill Lynch of the junk jumps less the annual percentage rate of the Constant maturity Treasury 7 years. Source: Federal Reserve Bank of San Francisco

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