Now, let's say a few words about legends that surround junk bonds. So, I'll put it like this. Well, I'm not going to be comprehensive. It's unrealistic when you talk about myths and legends but certain things of that are oftentimes misunderstood. We will specifically emphasize and we'll try to understand here. I will start with the thing that is sort of not a complete legend that we talked about at the very end of the previous episode and that will put that like junk bonds are super risky. Well, we said that not quite because empirical studies have shown that their actual performance proved to be better than was expected by the yields that the investors were requiring. And then we said that the other side of the coin is that when you push hard and when you tell everyone that junk bonds are not super risky, that is actually almost a free lunch. And if you're successful in this pushing, then a lot of people start to buy these junk bonds both at their issuance and then later on in the market, and as a result, the whole idea that junk bonds are risky starts to be sort of let's say blurred. So, this is a fact. This is somewhat a legend. But now, this whole idea led to something that can be nicely and solidly labeled as a legend here. Now one more thing here that I would like to point out is, we said like not quite but let's put it here. And then one more thing, when there was explosive growth in these junk bonds, remember when I talked about fallen angels, I said that when a bond is issued that it's not junk. It takes time, sometimes a lot of time, to reach the point at which the bond does become risky by the same token where they have a lot of issues when you do not have any defaults because defaults are likely to occur in the future. So, there is some let's say grace period, triple quoted, in which people enjoy the nice behavior of these bonds and those who happen to buy them. At really high yields, they can enjoy significant returns because if the bond performs nicely, then there are lot more people who would like to buy it. And therefore, if price goes up and the yield goes down then the ones who stepped in first, they can easily sell at a profit. But now, the next thing that is like I said can be better qualified as a legend is the following. It says that the junk bonds were the main source of M&A Financing in the 80s. Because this period of time, the 80s, it's all associated with that, we have junk bonds, we have Drexel, we have Milken, and we have Leveraged Buyouts, we have Management Buyouts, we have Going Private and stuff like this. We will talk about the last couple of things later this week. But this was not true. Remember, I said a few words and facts that there was the overall economic setup that fostered competition that promised high returns and so on and so forth. Now here, what actually happened was that the junk bonds, they were on the surface of that. Their overall contribution to the value of the M&A market was less than 10 percent. And oftentimes, when people talk about the 80's and about these wealthiest times, they all said, well, that was the age of junk bonds. So, that's a classic legend. So, indeed, junk bonds were seen they probably attracted the most attention. They later with the most coverage but there were other sources of financing namely, borrowing in privately first of all and sometimes even in other instruments that have higher grades. Now let's proceed with that. Now the next thing that sometimes is seen to be the outgrowth of the previous legend is that junk bonds caused the M&A boom of the 1980's. Well we already know that in terms of volume, it was less than eight percent of the total value. So, it is unlikely to have caused that. Some people say well this was a catalyst. Maybe, but if we compare that with the previous M&A boom of the 60's well nothing of that kind existed and that by no means prevented this boom from happening. So, there were other ways to finance these mergers. And the other thing, which I believe is kind of important is that people say well this was the overall idea of high risk here well that was. But the likely result of all that was that this is a classic hen and egg story. It's more likely that it was the other way round. So, actually the M&A boom led to the establishment and growth of junk bonds. Well because there are lot of transactions that were financed with private debt they were not on the front pages of magazines and newspapers and on TV shows. So that was like this. And now, one more thing that is sort of also linked to that but I believe that this is a legend too is that junk bonds grew fastest of debt. Well, this is wrong. Let me give you some numbers and they are more detailed, no handouts that if we take over the period of 1979 to 89, so this decade, then at this time, the junk bonds, they went up by about $190 billion. Over the same period of time, corporate debt went up by so much 1.3 trillion. So, it was about 15 percent less than that. Not only that, we can say that around the same period of time investment grade went up by 100 percent, now loans by 150 percent and then commercial paper more than quadrupled. So, you can see that actually the situation was such that maybe it was the overall growth of corporate debt that pushed the junk bond market exactly as was the case in our analysis of legendary. So, here I understand that when we sort of analyze these statements and we'll label them legends and then say well this was not quite as a lot of people think it was. Now, when you are sort of removing the veil of this legend this is maybe not no more such a romantic thing and it's not so nice but it really saves us from seeing certain important stages in the development of capital markets in the wrong way. And that in itself is very much important. Now here, I am sort of wrapping up the discussion of these junk bonds because this is sort of a more or less well not journalistic, it's the discussion that is strict to the point. But we are moving forward in our analysis of other forms of financing of that played the key role in some major M&A transactions.
