The Future of Junk

Spurred by a climate of generally falling interest rates, the market for new

junk issues staged a dramatic turnaround in 1991. Disgusted by the low rates

offered on certificates on deposits and on investment-grade bonds, many investors

took a new interest in junk. Also, corporate repurchases of junk bonds helped to

buoy the market. Former Drexel clients such as RJR Nabisco and McCaw

Cellular Communications seized the opportunity of buying in high-cost debt and

retiring it. The repurchases shored up the companies' balance sheets and made

their remaining junk bonds more creditworthy, causing bond prices to rise.

We may still be only in the beginning of the junk era. A number of current

innovations could consolidate and strengthen the market, and even change its

direction in the future. One straightforward development is the junk fund -- a bond

fund specializing in high yield securities whose credit quality is rated below

investment grade. Spreading its risks between different industries and different

corporations, the bond fund presumably should be able to reduce the overall risk,

while still offering the investing public an attractive return. Riding the wave of

the resurgent junk market in 1991, the bond funds racked up an average total

return of 36 % that year, counting dividends and price appreciation. And junk

funds turned in two strong years in 1992 and 1993. Increasingly, high-yield debt is

no longer offered to refinance existing junk or bank debt, but for expansion or

other purposes. Some companies are even issuing junk to weather a rough patch of

cyclically low earnings or industry overcapacity.

An even fancier innovation is the collateralized bond obligation, or CBO. A

CBO is a pool of repackaged and over-collateralized junk. For instance, a $150

million CBO issue may be backed by junk bonds with a face value of $180
million. The diversification and extrapayments enable the CBO to receive an

investment-grade rating from the credit-rating agencies. CBOs generally have

three "tiers". The top tier, which consists of a pool of higher quality junk bonds,

might pay an interest of about 8% to its holders. The second tier, somewhat less

secure, might have a 11 % coupon rate. The bottom, and riskiest tier, may not pay

a fixed interest rate. Instead, holders of third tier get the residual interest payments

that are left once the top tiers have been paid.

High yield corporate bonds are sometimes called “junk bonds.” This less than glamorous description
comes from the fact that these types of bonds are issued by corporations that aren’t the most credit-
worthy. Buying a bond from a stable large company (think IBM, Microsoft, Apple, etc.) gives a very high
chance that the semi-annual interest payments will be made without fail during the life of the bond and
the principal value will be paid back to the investor when the bond matures.

over time, most of these bonds are successful and pay enough extra interest to investors to account for a
few failures along the way and still come out ahead. High yield bonds usually pay an average of 5 to 6
percent higher interest than bonds from the larger well-established companies.

Information Technology Index is designed to track the performance of U.S. dollar-denominated, high-
yield corporate bonds issued by companies in countries with an official G-10 currency, excluding Eastern
Europe, by constituents in the information technology sector. Qualifying securities must have a below-
investment-grade rating (based on the lowest of S&P Global Ratings, Moody’s, and Fitch).

New computer technologies, and increasing access to the Internet, have the potential to affect
investment advisory services substantially in the next century.

Many investment advisers are taking advantage of the extensive information that is available
electronically to research potential investments for their clients.

As investors have become more comfortable with using their personal computers, some advisers have
begun to provide advisory services on-line, creating a new medium for their services.

The Commission has provided guidance regarding a variety of legal issues created by the use of new
technologies by investment advisers, and the Commission will continue to facilitate the future use of
such technologies, consistent with investor protection.

Information and communications technologies are critical to healthy and efficient primary and secondary
markets.
Developments in Information Technologies (IT) have been one of the major underlying forces

that have contributed to the reshaping of international trade and international capital flows over

the last decades. Among the other forces that have been influential, we must single out the

importance of liberalisation and the elimination of barriers to trade.

SMEs in INDIA:

Small and medium-sized enterprises play an important role in sustaining the economic stability of
developed and developing countries. In emerging markets, small and medium-sized companies are
operating on a stagnant and competitive front. On the static front, small and medium-sized enterprises
contribute to the country's production and build jobs, while on the dynamic front, they serve as
nurseries for large businesses, provide the next stage for rising micro-enterprises, and also contribute to
the country's national income.

The following reasons convinced us to concentrate solely on small and medium-sized enterprises in
India:

India is one of the top emerging economies in Southeast Asia, with SMEs accounting for 95 per cent of
the Indian Industrial Ecosystem. In addition, small and medium-sized enterprises provide jobs to a very
large and vulnerable segment of Indian society and encourage foreign trade by promoting exports and
fostering and fostering the spirit of entrepreneurship.

Undoubtedly, small and medium-sized companies have tremendous potential and, in order to take full
advantage of these businesses, the financial ecology of the SME sector needs to be thoroughly studied.
Furthermore, it is also important to examine the current financing conditions of Indian small and
medium-sized enterprises, because even after contributing 17 per cent to India's gross domestic product,
the literature shows that small and medium-sized enterprises are struggling to obtain financing for their
investment and development (Zaidi 2013; Dalberg 2011; Allen et al. 2012; Thampy 2010; Dogra and
Gupta 2009; Seshasayee 2006; Srinivas 2005). This clearly indicates that the lack of access to finance is
the primary reason why SMEs are underdeveloped.

As advocated by Cook (2001), ‘The role of finance has been viewed as a critical element for the
development of SMEs.’ According to the 2007 micro, small and medium-sized enterprise census, almost
92% of small and medium-sized enterprises in India do not have access to any formal sources of finance;
they are either self-financed or dependent on an informal source of finance.Small and medium-sized
businesses are especially limited by weaknesses in the financial system, including high operating costs ,
high collateral requirements and lack of expertise within financial intermediaries. Funding barriers are
therefore seen as significant growth-restricting factors for small firms. In addition, SME financing remains
one of the most under-researched fields in developing countries (Dalberg 2011).

India is a country of diversified geography. A greater number of firms have been established in the
northern and western regions of India.There is no major variation in funding variables across the country
or there is no regional difference in funding for small and medium-sized enterprises. This may be due to
the impact of technology that makes the position irrelevant for obtaining finance, and therefore the
position of a company may not be an obstacle to accessing financial capital.

GRAMEEN BANK:

The Grameen Bank of Bangladesh is a micro-credit institution that loans small amounts of money to poor
people who are neglected by the traditional banking system due to their lack of collateral.

The Bank supported 7,000 micro-lenders with 25 million clients worldwide.

Its method of small loans has advanced, in particular, women's economic rights and has led to national
economic development.

The Grameen Bank model to counter poverty has also been adopted by developed and developing
countries.

BACKGROUND:

Across the world , women lack power over material resources and are typically less likely than men to
recognise their full economic rights. The Grameen Bank in Bangladesh has been set up to empower poor
women.

The Grameen (village) bank was founded by Professor Mohammed Yunus in 1976, when the country was
hit by famine. Using $26 from his own pocket, he lent cash to poor village women to invest in the
livestock and materials they needed to make their own money. He obtained sponsorship from the
Central Bank of Bangladesh as well as from commercial banks, and in 1983 the Grameen Bank became
an autonomous body.

The Grameen Bank, reversing traditional banking practises, loans to the poorest in society. The bank
relies on the theory that good credit bets are actually only for those who are too bad to get bank loans.

Women, who make up 94% of its clients, use bank loans to invest in business projects such as matt-
weaving and small-scale farming.

Grameen Bank is currently lending $1.3 billion to 2.3 million borrowers, the majority of whom are
women. The $2 billion operation, with 1.128 branches, serves 38,951 villages, covering more than half of
Bangladesh 's total villages. The average credit is $160.

Despite a national 62 percent (78 percent for women) illiteracy rate, economic activity in rural
Bangladesh has seen a marked increase since the bank was launched.

In 1998, for his efforts to combat poverty, Dr Yunus was awarded India's Indira Gandhi peace prize.

A WORLD-WIDE TREND:

The model of Grameen Bank has been copied by Banco do Nordeste in Brazil and Dagang Bali Bank in
Indonesia.

The United States and the United Kingdom have both welcomed their own poor communities with
micro-lending institutions.Since 1995, the People's Fund in the US has provided micro-loans to
vulnerable women and ethnic minorities.In Britain, there is a large micro-credit infrastructure.

There are 62 local schemes lending £ 5,000 or less to help the 'financially excluded' begin self-
employment or start a business, the British Bankers' Association said. The British government has also
encouraged the credit unions' expansion.

Western banks have been supported by the UN to lend more capital to micro-lending institutions, and
the World Bank is a major Grameen Bank supporter.

PROBLEMS:

There are still many problems that restrict the goals of the Grameen Bank.

Critics have charged that loans to those who need them most are rarely issued by micro-lending
institutions and that the interest charged to micro-lending institutions can be prohibitive, as they are 30
to 50 percent higher than commercial banks.

They claim that since they lack basic business skills, recipients will sometimes not make the best out of
the loan they are granted. In addition, the small amount they earn only encourages individuals to
exchange products, not to become independent producers.

While women are the primary recipients of the loan, men are also the main recipients, as many
husbands claim control over the money after it has been secured by their wives.

There were reports in Western newspapers in 2002 that, between 1993 and 2000, Grameen Bank had
experienced an 85% decline in earnings.

However, Dr. Yunus argues that Grameen Bank is in its 'strongest position ever.' He noted that in 30 rural
communities in Bangladesh, the bank is currently helping to fund renewable energy projects. It offers
loans so that individuals can buy solar panels and telecommunications equipment to promote the usage
of the Internet.

The Grameen model does not provide a global solution to poverty, but by helping to motivate some of
the world's poor in the short term, it paves the way for longer-term poverty eradication initiatives.