The History of Junk Bonds and Leveraged Buyouts

Abstract

Abstract Leveraged buyouts (LBOs) and their effect on the economy (following their history that started in 1919 with the first LBO of Ford Motor Company) cannot be adequately discussed without taking into consideration the junk bonds. The reason for this necessary linkage is directly connected with the power that rests in the junk bonds, because they are used to finance LBO deals. The original-issue high-yield debt instrument, the so-called “junk bond” innovation, was pioneered by Michael Milken of Drexel Burnham, providing many hostile bidders and LBO firms with the enormous amounts of capital needed to finance multi-billion-dollar deals. The history of these two instruments goes hand in hand, as for example, the conjunction between the U.S. recession of the early 1990s along with the junk bond market crash following the fall of the investment bank Drexel Burnham Lambert, brought the first LBO wave (the one that started in 1980) to an end. This is not the only example that shows a true connection between LBOs and junk bonds. This paper aims to bring into light the liaison that exists between these two instruments and the history that was created by the financing of LBOs with junk bonds. The present article will bring into focus the speculations that rests on the idea that the junk bonds has proven to be a life saver to big leveraged buyout groups as companies are able to get access to funding as investors look to invest in companies with high yields. Apart from this subject, this paper will try to figure out the role that the junk bond market plays in new LBO's, especially the ones created after 2012 (there was a slowdown in the LBOs activity after the financial turnover from 2008, and only after 2012 we can observe an improvement in the leveraged buyout market). This research paper will try to stimulate thinking about the effects that are generated on a market by a LBO, the power that exists behind a leveraged buyout (e.g. the junk bonds) and the connection that makes them prevail and become powerful, mainly together.