The Growing Recognition of Credit Risk in the Corporate and Financial Bond Markets

Yukio Muromachi

Introduction

Corporate failures reached a high of 17，439 in fiscal 1997， surpassing the post-bubble peak of15，006 in fiscal 1995， and appear to be accelerating in fiscal 1998.Amid the stream of newsreports on failing financial institutions， securities companies， and business companies， one inparticular stands out: the application for bankruptcy protection under the Company Reorgani-zationLaw by Japan Land Development late last year， because it represents the first default ona domestic straight bond offering that resulted in an actual loss.

The 57.1 billion yen default consisted of four straight bond offerings totaling 50 billion yenand one convertible bond offering of 7.1 billion yen. This surpasses by far Yaohan Japan's34.4 billion yen convertible bond offering a year earlier. And while Yamaichi Securitiesdeclared bankruptcy a year ago with an even larger total of convertible bonds， the entireamount was covered by special loans from the Bank of Japan. Thus the size of the Japan LandDevelopment default and its treatment are of particular concern to the bond market.

This paper gives a brief account of the present status of the secondary bond market， with spe-cialattention to the relationship between domestic straight bond and financial bond prices，bond ratings， and the issuing company's stock prices.