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Credit for Everyone: Innovation in Finance Without Fintech

Dec 7, 2017 11:13 AM 2 min read

Credit for Everyone: Innovation in Finance Without Fintech

Editor’s comment: High-yield bonds are a form of debt which requires the issuer to pay a high coupon (i.e. interest) to the investor. They are mainly issued by early stage / small and medium sized companies who agree to pay a higher interest to compensate for a greater risk of default. These bonds, though risky as investments, are essential to provide much-needed financing to the not-so-large businesses. The high-yield bond market has flourished in the US, Western Europe, and China whereas it is yet to “deepen” in India where there are only 20-odd companies which issue these instruments.  


Innovation in Finance need not just be technology-driven. Came across this very interesting slide from a presentation by Michael Milken (American former financier and “Junk Bond King”) that shows job creation of Fortune 500 companies in the US vs. the so called “Mid-tier companies who were not AAA rated” post the start of the high-yield bond market in early 1980s.


Source: “Towards a More Prosperous Future” – Presentation at Goldman Sachs 2013 Global Macro Conference, New York by Michael Milken


Some quick thoughts on this:


  1. Access to credit for mid-tier Indian companies can be improved tremendously by deep and functioning non-investment grade bond markets
  2. Secondary markets with depth will allow for price discovery, hence reducing although not completely eliminating the “jump risk” in credit
  3. Though India as an economy is very different from the US in the early 1980s but the impact on job creation cannot be ignored
  4. The most interesting take-away is that a lot of these mid-tier companies which were not AAA rated and benefited greatly from a high-yield corporate bonds eventually went on to become massive companies such as Viacom, MCI, Time Warner and News Corp. Access to efficient credit at the right stage was a major factor in ensuring their business success which has driven job creation


Large corporates in India do and will continue to lead the way in job creation and growth, however mid-tier companies could enhance their share if given a boost


Read full presentation here 


Originally published on Medium