The First Junk Bond: A Story of Corporate Boom and Bust

Business people will find particularly enlightening details of the company's bankruptcy filing affected various stakeholders, the bankruptcy negotiation process, and the alternative post-bankruptcy structures that were considered.

Categories: Banking & Finance | Bankruptcy and Insolvency

Of Interest:

Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken

Full Faith and Credit: The Great S&L Debacle and Other Washington Sagas

Investing in Junk Bonds: Inside the High Yield Debt Market

The High-Yield Debt Market: Investment Performance and Economic Impact

This engrossing book follows the extraordinary journey of Texas International, Inc. through its corporate growth and decline, debt exchange offers, and corporate rebirth.

It is a case study of a company that exemplified the 1980s, complete with fascinating people, financial innovations, and successive rounds of high stakes poker, as the misfortunes of the company unfold. Detailed is the involvement of Drexel Lambert banking house and its guiding spirit Michael Milken, who secured fresh capital for the company through the issuance of a high-yield bond with an above-market rate of interest to counterbalance its elevated credit risk.

From Turnarounds and Workouts, August 15, 2002
Review by Gail Owens Hoelscher

Only one in ten failed businesses is equal to the task of reorganizing itself and satisfying its prior debts in some fashion. This engrossing book follows the extraordinary journey of Texas International, Inc (known by its New York Stock Exchange stock symbol, TEI), through its corporate growth and decline, debt exchange offers, and corporate renaissance as Phoenix Resource Companies, Inc. As Harlan Platt puts it, TEI "flourished for a brief luminous moment but then crashed to earth and was consumed." TEI's story features attention-grabbing characters, petroleum exploration innovations, financial innovations, and lots of risk taking.

The First Junk Bond was originally published in 1994 and received solidly favorable reviews. The then-managing director of High Yield Securities Research and Economics for Merrill Lynch said that the book "is a richly detailed case study. Platt integrates corporate history, industry fundamentals, financial analysis and bankruptcy law on a scale that has rarely, if ever, been attempted." A retired U.S. Bankruptcy Court judge noted, "(i)t should appeal as supplementary reading to students in both business schools and law schools… Even those who practice…in the areas of business law, accounting and investments can obtain a greater understanding and perspective of their professional expertise."

"TEI's saga is noteworthy because of the company's resilience and ingenuity in coping with the changing environment of the 1980s, its execution of innovative corporate strategies that were widely imitated and its extraordinary trading history," says the author. TEI issued the first junk bond. In 1986 it achieved the largest percentage gain on the NYSE, and in 1987 suffered the largest percentage loss. It issued one of the first bonds secured by a physical commodity and then later issued one of the first PIK (payment in kind) bonds. It was one of the first vulture investors, to be targeted by vulture investors later on. Its president was involved in an insider trading scandal. It innovated strip financing. It engaged in several workouts to sell off operations and raise cash to reduce debt. It completed three exchange offers that converted debt in to equity.

In 1977, TEI, primarily an oil production outfit, had had a reprieve from bankruptcy through Michael Milken's first ever junk bond. The fresh capital had allowed TEI to acquire a controlling interest of Phoenix Resources Company, a part of King Resources Company. TEI purchased creditors' claims against King that were subsequently converted into stock under the terms of King's reorganization plan. Only two years later, cash deficiencies forced Phoenix to sell off its nonenergy businesses. Vulture investors tried to buy up outstanding TEI stock. TEI sold off its own nonenergy businesses, and focused on oil and gas exploration. An enormous oil discovery in Egypt made the future look grand. The value of TEI stock soared. Somehow, however, less than two years later, TEI was in bankruptcy. What a ride!

All told, the book has 63 tables and 32 figures on all aspects of TEI's rise, fall, and renaissance. Businesspeople will find especially absorbing the details of how the company's bankruptcy filing affected various stakeholders, the bankruptcy negotiation process, and the alternative post-bankruptcy financial structures that were considered. Those interested in the oil and gas industry will find the book a primer on the subject, with an appendix devoted to exploration and drilling, and another on oil and gas accounting.

This is the comprehensive story of Texas International Inc., a small domestic oil and gas company, that needed new capital resources for growth. It turned to Drexel Burnham Lambert and Michael Milken who engineered the first junk bond issue at high interest rates. This book records the unusual events that befell the company, from its corporate growth and decline, debt exchange offers, and bankruptcy, to its corporate rebirth. Readers will find interesting background on the oil and gas industry as well as discussion of the financial wheeling and dealing that set the precedent for corporate financial innovations in the 1980's. Anyone interested in the 1990 financial issues of bankruptcy, exchange offers and corporate reorganization will find the book an illuminating case study.

An account of the first company to approach Drexel Burnham Lambert and Michael Milken about floating high interest, minimally secured "junk bonds."

Rich in detail, this story reminds us that a junk bond is only a high-yield security whose return compensates for the additional credit investors assume. A useful volume for college libraries where finance is an integral part of the curriculum.

[An] important contribution. ... The book provides important insights into how the biography of a firm (Texas International) intersected with the history of a market (the high yield market) to produce an entertaining and instructive chapter of American business history.

From Judge Paul W. Glennon, Retired, US Bankruptcy Court, District of Massachusetts

The book has a wide range of possibilities. ... as supplementary reading to students. ... And even those who practice in the areas of business law, accounting and investments can obtain a greater understanding and perspective of their professional expertise.

A richly detailed case study, Platt integrates corporate history, industry fundamentals, financial analysis and bankruptcy law on a scale that has rarely, if ever, been attempted. The book distills events that occurred over a number of years. Readers can imbibe lessons that would otherwise be inaccessible to all who had not lived through, and closely monitored, Texas International's ups and downs. In effect,The First Junk Bond is a valuable input into an expert system for securities ananlysts. Platt has provided a welcome dose of applied research in a field increasingly dominated by abstract theory.

Harlan D. Platt is Professor of Finance in the College of Business Administration at Northeastern University. He is the author of two other books, The first Junk Bond an Principles of Corporate Renewal, and has published over 35 academic articles. Professor Platt is also the faculty dean of the Turnaround Management Association, where he created and administers its certification program. He serves on the board of directors of Prospect Street High Income Portfolio, Inc., listed on the NYSE, and VSI Enterprises, Inc. on the NASDAQ, and is president of 911RISK, Inc. a firm specializing in developing analytical models that predict corporate distress.