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With regard to companies, the positive benefits would arise on account of: -

a. Due to lesser restrictive covenants and lack of asset security, the firms would be free to make use of their assets in the best productive manner leading to enhanced efficiency.

b. The longer duration of junk bond tenure would facilitate better asset liability management and put an end to the situation of frequent liquidity problems faced by the companies.


c. Moreover, the high yield bond markets would enable companies to raise resources directly from investors, avoiding intermediaries such as banks and their spreads.

Thus, in short, success of high yield debt market hinges on four different factors: -

a. Default rate
b. Economic strength
c. Interest rates
d. Bank lending profile

4. Conclusion

With careful evaluation of each of these parameters, logical steps should be undertaken for establishment of a sound high yield debt market. However, it is to be remembered that any financial market goes through phases such as boom followed by crash. Then the market recovers but soon meets with another financial downturn and finally matures. Thus, with sound fundamentals, junk bond market that served as an engine of growth in US during the early 1980s can be effectively utilized for accelerating the pace of development of Indian economy.

Annexures

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* Contributed by -
Saurabh Joshi & R. T. Sivasubramaniyan,
PGDM - II Finance,
SCMHRD, Pune.