Between June 1986 and April 1987, the high-yield debt market grew from $93 billion to over $125 billion. High-yield debt is now approaching 20 per cent of the total corporate straight-debt market. “Fallen angels” comprise about 30 per cent of the high-yield total, but original issues continue to gain ground. In 1986, new-issue high-yield debt broke all previous records, accounting for 22 per cent of the total corporate straight debt issued that year; about 50 per cent of the new-issue dollars went for merger and acquisition-related activities.

The total amount of high-yield debt defaulting in 1986 also shattered the previous record. Over 55 per cent of the $3 billion total was related to the giant LTV bankruptcy. Although not a record, the default rate—3.39 per cent of total straight debt outstanding as of mid-1986—was high for a non-recession year and heavily concentrated in steel and energy issues. Even after accounting for defaults, however, the total rate of return on a diversified portfolio of high-yield issues was a respectable 16.1 per cent for the year.

An examination of the credit quality of the high-yield market reveals that, while overall quality declined, the quality of lower-rated debt and of new issues improved. The Zeta credit scoring model red-flagged all the 1986 defaults. This would have allowed investors to save between 29 and 40 per cent by selling prior to default.