In the mid-1980 high-yield bonds also known as ‘Junk Bonds’ came into existence. Milken and other investment bankers at Drexel Burnham Lambert which was an American Investment Bank created the high-yield bonds that were speculative grade from the beginning. A speculative-grade rating indicates that the company is less likely to be able to pay back to the creditors in comparison to an investment-grade company.

Speculative grade ratings include BB, B, CC, and C by Standard and Poor's credit rating agency. Ratings at Fitch from BB to D are considered to be speculative.

High-yield bonds were used as a financing mechanism in the leveraged buyouts and hostile acquisitions. The hostile takeover means an acquisition against the willingness of current management and board of directors by the acquiring company. In regards to LBO and Acquisitions, the acquirer would issue speculative grade bonds in order to pay to the target company and then use the target company’s cash flows to repay the debt over time.LBO referred to as leverage buyout is the acquisition of the company by a private equity firm.High-yield bonds are likely exposed to default, so they pay higher returns to compensate investors.

The below-mentioned ratings are high yield bond ratings by Indian credit rating agencies

High-yield bonds are divided into two categories:

Fallen Angel-Fallen Angel means someone was good at one point in time and currently has turned bad. Fallen Angel bonds are the bonds that were considered investment-grade bonds but later turned into speculative-grade bonds. The reason for the change in the credit ratings would be declining revenue of the company, financial trouble in the company, debt burden, etc

Rising Star- Unlike a Fallen Angel, Rising Star is referred to those bonds whose ratings have improved because of the company’s improving credit score but they continue to remain under the Junk bonds category for other factors

Benefits to investing in High-Yield bonds:

1. Higher returns- The vital reason investors invest in Junk bonds is due to the high returns they see in such investments in comparison to investment-grade bonds.

2. Credit stand- This means it is clear that a company is performing well and doing the right things to improve its credit rating. It is always a smart move to invest in high-yield bonds before they reach the investment-grade level. This will help the investor to enjoy the returns as well as the security of an investment-grade bond.

3. Secured creditor- If the company goes into bankruptcy or if the company fails and shuts down, the bondholders will be paid first in regards to equity holders. The word "junk" can be misleading to investors but such bonds do provide a safer investment over stocks.

It is important to understand that the companies issuing such high-yield bonds are reputed companies who are facing a blip due to an unproductive season, , compounding mistakes, or other business hardships. These reasons make the company's debt climb high and in turn, bring down their rating.

Having vigilant research of the market, industry, and the company before you make an investment can help you to find out if the company is just undergoing a hard time or it is at the stage of default.

High-yield bonds are a good way for an investor to diversify their portfolio. Junk Bonds can be a lucrative investment opportunity for those who can take the heat and withstand the market volatility it comes with, to reap the benefits of its returns. What it ultimately comes down to is weighing the merits of the bond, against one’s individual investment and portfolio requirements - assessing whether or not they can bear the brunt of investing in high yield bonds. Bondskart has a team of experts to help you make the most informed investment decisions.