In the 1950s, the producers’ association for one of the lesser appellations within the Burgundy wine region hatched a cunning plan to rejuvenate their members’ struggling fortunes. Rather than invest capital they didn’t have to improve the quality of their vin ordinaire, the winemakers decided on a bold promotional strategy of bringing forward the release date of their next vintage to mid-November – just a matter of weeks after the grapes had been harvested. To publicise the event, they would stage a race to get the first bottles of the new vintage to Paris. Beaujolais Nouveau was born.
The plan worked: by the 1970s, “Beaujolais day” had become a national event and the vignerons’ businesses were transformed, not just by rising popularity in their wines, but also from a cash-flow perspective, as most of the year’s revenues were banked far earlier in the calendar than ever before and almost all in one go. It didn’t stop there, either. After spreading across the French border into the rest of Western Europe, including the UK, the event eventually went global. At its zenith, in the early 1990s, there were races transporting bottles on planes, trains and automobiles across oceans and continents as far as the US and Asia, all accompanied by high profile media attention.
This was also a big hit within the world of corporate entertainment. At the stockbroking firm where I worked at the time, the Beaujolais Nouveau party was easily the most successful promotional function of our year and proof of the old saying: “you can’t polish a t*rd, but you can roll it in glitter”. We plied our clients with gallons of cheap plonk that made their teeth go blue, their tongues black and their heads hurt and the next day they called to thank us profusely and give us business. What a pleasure! In terms of its effectiveness as a marketing exercise, the phenomenon that is (was) Beaujolais Nouveau, must surely have no equal.
Or maybe it does!
The modern junk bond market was born out of the US M&A boom of the 1970s as a means of financing takeovers and leveraged buy-outs, allowing companies to gear their balance sheets far beyond conventional levels by issuing low-quality debt (rated BB / Ba and below). To compensate for the lower credit quality and greater risk to which their owners were exposed (hence “junk”!), the bonds paid commensurately higher coupons than investment grade equivalents. This historic yield premium has varied over time (see chart), but at extreme points in the market / credit cycle, the losses suffered by investors have been every bit as severe as those in equity markets.
Like many “new” asset sub-classes, both before and since, the market grew rapidly and by 1989, total issuance had risen to USD190 billion – a 20-fold increase over the decade. Even at that point, however, it remained a relatively specialised area of the fixed income universe and represented only a small (9%) part of the total corporate market. Fast forward to today, there are approximately USD1.2 trillion dollars of junk bonds in issue and junk has accounted account for more than 50% of all corporate bond issuance since 1990. During this time, these bonds have become a staple component of many (most?) investors’ portfolios, either directly, or via funds and ETFs.
Importantly, while they remain the same relatively high-risk proposition within the fixed income space, somewhere along the way, junk bonds have been re-branded as “High Yield”. Like the unsuspecting buyers of Beaujolais Nouveau back in the day, one can’t help wondering if these would be quite so popular an investment if they were still called “Junk”.
Rebranding Junk Bonds