What is a Junk Bond?

Junk bonds, also known as "high-yield bonds," are non-investment grade bonds issued by US companies. US bonds are generally classified into government bonds, "investment-grade" corporate bonds, and "non-investment-grade" "junk bonds". 95% of U.S. companies issued bonds are the latter. Usually issued by smaller new industries or companies with shorter credit relationships. However, there are also some large companies that issue such bonds. Their bonds were originally investment grade. However, due to financial difficulties or the decline of the entire industry, their bonds have been depreciated to "junk bonds." If operating conditions improve, "junk bonds" can also rebound into investment-grade bonds. Generally, the interest rate of "junk bonds" is 2-4% higher than that of US government bonds. ^[1]

Junk bond

The word junk bond is translated from English Junk Bond. Junk means junk, fake, scrap, coax, etc. The reason why it is used as an adjective for bonds is that this investment has high interest (generally 4% higher than national debt), high risk,

The Commercial Press's "English-Chinese Securities Investment Dictionary" explains:

Junk bonds are defined according to the two largest U.S. bond rating agencies

There were several reasons why junk bonds became popular in the United States in the 1980s:

First, the early 1980s coincided with the period of large-scale adjustment and reorganization of the U.S. industry. The renewal and the funds required for mergers and acquisitions caused by the stock market were not enough.

Huge amounts of junk bonds, like big bubbles that are inflated, will eventually burst. Due to the declining bond quality and 1987

Investors need to pay attention that the credit of junk bond companies may be good, they may just want to issue no-grade bonds that are easier to occupy the market. Chances of junk bonds failing to fulfill their obligations are far greater than those with investment credit ratings (above BBB grades). However, high risk also means that junk bonds have higher returns than other high-grade bonds. Not all junk bonds will fulfil their obligations. In fact, most junk bonds will not. Generally, the issuing company will continue to pay interest until the maturity date, or redeem the bonds and refinance using the rated bonds.

Lack of liquidity is garbage

Junk Bond Buffett

Buffett's investment company, Berkshire Hathaway Inc., released its fourth-quarter annual report, which showed that profits increased to 1.18 billion, mainly due to its high profits in junk bonds. This is the company's highest profitability since the second quarter since 1998.
Buffett said: "Purchasing junk bonds proves to be a very profitable business. Although common stock prices have been attractive after three years, we still feel that few stocks can attract us." Buffett is giving investors The letter wrote that he would shut down his company's derivatives business because he felt financial derivatives were a "time bomb" and it would be difficult to assess the value.

In 2009, Buffett issued a warning on a large amount of junk bonds. So far, the form of US stocks is not suitable for buying junk bonds. People who want double-digit investment returns are purely dreaming. See Buffett Warning: Don't Touch Junk Bonds for more details.

Michael Milken

Michael Milken, the "junk of junk bonds" that once galloped on Wall Street in the 1980s, is the most American financial industry since JP Morgan

King of Junk Bonds Michael Milken

Influential figures have influenced and gently rewritten the history of the development of the securities and financial industry in the United States. The secret of his success was to find an uncompetitive capital market, to be preconceived and to become a monopolist.

Milken was born in 1946. His father was an accountant and lawyer. From an early age, he helped his father to classify checks, prepare bank statements and accounting books.

In 1970, Milken earned a master's degree in business administration from the prestigious Wharton School of the University of Pennsylvania in the United States, and later joined Drakes Philadelphia as an analyst. He researched that traditional Wall Street investors only valued those companies with good performance in the past when choosing loans or investment objects, and often ignored their future development momentum, and thus started his investment path of "junk bonds".

In 1974, the inflation rate and unemployment rate in the United States climbed, and credit was severely tightened. At the moment, many fund companies' high-return bonds in their portfolios were lowered by the credit rating agencies and reduced to "junk bonds". In the eyes of those who do, they have become rubbish that can bring no return. Many fund companies are eager to sell low-grade bonds in their hands, so as not to affect the quality image of the fund.

But Milken was keen to find out: "Since the United States gradually improved many regulatory measures after the Second World War, it was designed to protect investors from losses due to corporate bankruptcy or default. If a bankruptcy is allowed, its stock will not stop trading. Therefore, the lower the bond's credit rating, the higher the return to investors after its default. "He defined these junk bonds as" ownership bonds "worth having, In addition, they believe that these bonds can remain stable during periods of high interest rate risk, because their returns are linked to the company's development prospects, not linked to interest rates.

At that time, the "First Investor Fund", which had a large number of "junk bonds", accepted Milken's opinion and firmly held these "junk bonds". As a result, the "First Investor Fund" continued for 3 consecutive years from 1974 to 1976 It became the nation's best-performing fund in the year, and sales of the fund increased significantly.

Milken established a trading department specializing in low-grade bonds at Drakes Investment Company, thus starting his investment path of "junk bonds". He lobbied around to find people who were willing to buy "junk bonds", and Drakes turned these people into issuers of "junk bonds". The years of "junk bonds" invested by institutional investors he recommended quickly The yield has reached 50%. Milken and Drakes became famous and became monopolists of "junk bonds."

By the end of the 1970s, such high-yield bonds had become a very sought-after investment product due to Milken's leadership. Due to the limited number of "junk bonds", it has been unable to satisfy the buying desires of many fund companies.

Milken has a clever move: Instead of waiting for the credibility and credit degradation of those companies with "junk bonds", it is better to find some companies that are developing. If they lend them, their credit is similar to those of high-yield bonds At the development stage, the quality of bonds is much better than those of companies with declining returns and desperately reducing losses.

As a result, Milken became the God of Wealth for underwriting high-return bond financing for emerging companies and even high-risk companies. The cooperation with MCI is a classic. MCI was founded in 1963 and started with only $ 3,000. When MCI challenged AT & T, the world's largest telecommunications company, Milken raised $ 2 billion in junk bonds for MCI, making MCI Successfully broke AT & T's monopoly on the long-distance phone market.

In the 10 years from 1977 to 1987, Milken raised $ 93 billion, and Drakes' share of the "junk bond" market increased to $ 200 billion, making Milken the nation's "junk bond king".

In 1982, Drakes began to acquire a large percentage of loans through the form of "junk bonds" to merge businesses, that is, leveraged buyouts.

As Milken became the God of Wealth for SMEs and investment companies, his personal income also soared. For example, in 1986, the commission income for trading had reached $ 550 million.

His influence in the financial world is also sky-high. In December 1984, Milken orchestrated the bidding for Pigenas, which had made his fame assault on Gulf Oil. Although the bidding was unsuccessful, it proved that Milken has the ability to raise billions or even tens of billions of dollars in a few days.

Because the acquisition of the enterprise requires the cooperation of Milken's bond department, if Milken agrees to underwrite the bonds for the acquisition of the project, Drakes will send a letter to the client stating that it "has high confidence" to provide the necessary funds for the acquisition of the company. This letter is extremely powerful. Once issued, no company listed on the stock exchange can escape the fate of being acquired. Therefore, the managers of the companies that did not want to be acquired were shocked by the letter of "high confidence" in Milken.

Since the late 1980s, people have been suing Milken for illegal operations. The court confirmed Milken's six counts in 1990, all of which were unprecedented: covering stock positions, helping clients avoid tax, and hiding accounting records, all of which had nothing to do with internal transactions, manipulation of stock prices, and bribery.

Milken was eventually sentenced to 10 years in prison, with compensation and fines of $ 1.1 billion, and barred from working in the securities industry, ending Milken's legendary experience as a "junk bond".

As a dealer, Milken pioneered and occupied the entire junk bond industry. Although Milken was imprisoned, his theory was not abandoned by the financial community. "Junk bonds" have been widely accepted as a financial instrument, becoming an important way for SMEs to raise funds and an important means of acquiring enterprises.

In 1993, Milken was released early. In 1996, he and his family and friends invested $ 500 million in education services as a goal, founded Knowledge Universe, and then began acquiring and uniting related companies. He acquired Leapfrog Company, which manufactures smart toys, and increased its annual output value from 17 million to 80 million US dollars the next year. Former education base. Knowledge Universe has 13 subsidiaries with an annual output value of more than 1.5 billion US dollars.