Viewpoint / Can the Copywriter

Some copywriters should evidently consider a change of career, since the harm they cause with a careless slip of the slogan can far exceed their usefulness.

One such copywriter, hailing from the U.S., was the one who coined the phrase "junk bond" for high-risk paper. Subsequent attempts to re-dub them "high yield" vehicles were doomed to fail, given the gutter appeal of the original.

America's marketplace gradually became accustomed to the mucky imagery. In a market of that size, there will be enough buyers willing to take a fling with risky bonds issued by shaky companies. In fact, there's a whole industry based on investment in bundled junk bonds based on stats. The risk is compensated by unusually high yields; the assumption is that if you buy a wide enough range, the portfolio's average will cover a few companies that collapse outright.

That cannot be said for Israel's marketplace. It is being slowly strangled by the credit crunch at the banks. Small, young companies urgently need capital but the capital market refuses to supply their needs.

The bond market continues to compete with the banks in extending loans to the big players, but refuses to give credit to the smaller players over which there is no competition.

The refusal is one of principle; it has nothing to do with potential yields. Therefore, even if the small borrowers are willing to compensate for the added risk in the form of handsome yield, the institutional investors won't bite.

Cynical and other answers

Plenty of cynical explanations offer themselves for the situation. One is that the leading bonds, the ones rated AA, are really junk in disguise anyway. And what would be junk bonds by the books are so junky that no sane person would touch them with a barge pole.

Another explanation points at the investment committees of the institutional investors. Not one has won kudos for taking a fling in a junk bond, and winning. There are, however, investment managers who were canned for losing gambles like that.

"The investment committees would hang us out to dry for the 10 percent of junk bonds that go bankrupt," explains one investment manager, "even if the other 90 percent generate phenomenal yields. So why should I risk it?"

But some possible answers aren't cynical at all. For instance, one is that the market can't slog through the phase of having a small number of junk bonds in circulation, a phase it must undergo to reach a sufficiently large number of junk bonds to build a "statistical" portfolio.

Or, maybe it's a question of time and maturity, and the market will get there eventually. There is also that sticky image problem, that nickname "junk" that is so hard to shake off.

Whatever the reason, Israel has no junk bond market, nor even a market for moderately high-risk bonds. The local bond arena remains barred to small companies below the top tier. Therefore, hopes that the bond market will serve as an alternative to the banks are unrealistic, from the perspective of the companies, and from the perspective of the investors and institutional investors who hunger for an increase in supply and negotiability in the marketplace.