Panic in The Junk Pile

The latent dread of junk-bond investors is that one really colorful case of corporate distress might set off a selling spree in the volatile market for the high-yield securities. Last week their fears shot to the surface when Canada's Campeau Corp. said it might default on its debt, which is in part composed of junk bonds. That disclosure sparked the market's worst drubbing since the Crash of 1987, as traders rushed to dump their holdings. During the week, junk-bond issues fell in price by $10 to as much as $130 for each $1,000 in face value. The rout left Wall Streeters wondering whether the securities that had fueled the decade's wave of takeovers and buyouts might be headed for a long-term crisis of confidence.

The $200 billion junk-bond market has grown explosively since the early 1980s, when Drexel Burnham Lambert's Michael Milken pioneered the use of high- yield bonds as a means to finance hostile takeovers. In the wake of his indictment last March for insider trading and racketeering, Milken has resigned his Drexel post and stayed far removed from the market. But speaking at a Manhattan conference on high-yield debt last week, Milken suggested that it was time to buy, not sell, junk bonds. Said he: "There is tremendous opportunity out there today."

Milken's creation had fallen on hard times even before the Campeau mess. So far this year, borrowers have defaulted on a record $3.2 billion worth of junk bonds, already $1 billion more than during all 1988. Among the notable casualties was Merv Griffin's Resorts International, which conceded last month that it could not meet its annual interest and principal payments of $133 million.

Investors had expected the junk-bond market to soften during an economic downturn. But they have been taken aback that defaults are rising and junk- bond prices are plunging during a time of relatively stable growth. The implication is that any serious industrial slump could give the junk-bond market a full-fledged nervous breakdown.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Cynthia Davis

CAPTION: Total value of junk bonds outstanding, in billions, at year-end