Junk bond

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A junk bond (or high-yield bond , junk bond , scrap bond ; English junk bond or high-yield bond ) is a bond of an issuer of poor creditworthiness .


To compensate for the by investors to wearing high issuer risk because of the risk of default of debt service that receives a higher coupon rate than comparable risk-free government bonds - this relationship explains the term high-yield bond . It should be noted that the term high-yield bond is vague because during a high-yield level, all new issues become high-yield bonds and they then no longer differ conceptually from junk bonds. It is not the interest rate level that determines the content of the term , but the creditworthiness.

As a buyer and creditor of bonds, the investor has an interest in being able to assess his risk of receivables at any time. To do this, he can carry out a credit rating of the issuer himself or rely on the evaluation by commercial rating agencies . Depending on the level of default risk of the interest and repayments, issuers are classified in good to bad rating classes. The worst rating classes (high default risk) are summarized with the collective term “speculative” ( English non-investment grade or junk ); hereunder covered bonds are bonds as scrap ( English junk bonds hereinafter). The rating codes of the major rating agencies usually classify “BB” or “Ba” and all worse than speculative.

Since the creditworthiness of the issuer is classified as poor, the creditor of the scrap bond bears a high risk of delays and failure of the agreed interest and repayments.

You can divide scrap bonds into two groups, namely slightly speculative ( English quality junk ) and highly speculative ( English real junk ). At Standard & Poor’s , the credit ratings BB and B are assigned as slightly speculative, CCC and worse than highly speculative. Junk bonds promise higher yields than standard bonds while at the same time accepting a higher probability of default . The higher default probabilities of junk bonds are confirmed by the empirical studies by Altman and Asquith / Mullins / Wolff. An empirical study of the US capital market by Blume / Keim shows that in the period from January 1977 to June 1991 the long-term average yield on junk bonds was 10.3%. During this period, it was thus above the average yields on bonds from companies with higher credit ratings (9.8%) and on long-term government bonds (8.9%). This difference in return is also called the spread ; the higher it is, the more likely it is a junk bond.

While companies with good credit ratings can generally obtain external liquid funds immediately for temporary bottlenecks, the issuers of junk bonds lack this flexibility ; they have fewer options for raising liquidity to service debt .


Michael Milken is known as the "king of junk bonds" after having worked for the New York investment bank Drexel Harriman Ripley (later: Drexel Burnham Lambert ) since January 1969 . He examined the above-average interest income ( english high yield ) of junk bonds, which of surprising in a corporate crisis geratenen issuers ( english falling angels were issued), in relation to the existing repayment risk. These corporate bonds , which were originally rated well, can become junk bonds if the issuer's credit rating deteriorates ( rating migration ) during the term of the bond. The oil and gas producer Texas International Incorporated (TEI) is considered to be the first company to issue scrap bonds in April 1977 at a nominal interest rate of 11.5% (US prime rate at that time: 6.5%). The liberalization of the US banking market that began in 1982 made it possible for banks and savings banks to purchase bonds. They also bought junk paper because of the attractive returns and largely ignored the comparatively higher risks. Milken ensured that scrap bonds brought in higher revenues for the issuing company than planned (by placing them for the "best effort") and induced these companies to buy scrap bonds from other companies with the additional proceeds . Drexel eventually dominated the junk bond market. In 1985, 50 percent of all buyouts in the US were funded by junk bonds. The scrap bond market in the United States increased from $ 7 billion in 1970 to $ 59 billion in 1985 to $ 146 billion in 1988. In 1987 the junk bond market collapsed during the October 19, 1987 stock market crash, followed by a crisis in the US savings banks , which had bought junk bonds on a large scale. These were redeveloped due to a law from 1989. Drexel filed for bankruptcy in February 1990.

When Robert Campeau's department store empire could no longer pay its interest on junk bonds in mid-1989 and went bankrupt shortly afterwards, this further unsettled the market. This was intensified when the buyout of the US airline United Airlines failed in October 1989 ; the junk bond market collapsed. In 1991, 10.6% of all junk bonds failed and were no longer serviced by the debtors . In May 2001 WorldCom issued the largest bond in American corporate history worth $ 11.9 billion with a yield of 8.3% (Prime rate: 7.0%) and had to file for bankruptcy in July 2002. This scrap bond, the largest in terms of volume, was no longer serviced.


Depending on whether a high-yield bond has become a scrap bond since it was issued or not until later, a distinction is made between "fallen angels" and "born junk bonds":

  • “Fallen Angels” are junk bonds from formerly well-rated issuers whose creditworthiness has deteriorated during the term of the bond. This is expressed in falling bond prices, which increases the bond yield. The investor has initially invested in a good bond risk, but it worsens with further holdings.
  • “Born junk bonds” are bonds that are issued by badly rated issuers. With them, the creditor consciously opted for a higher investment risk from the outset. He assumes that the bond debtor will be economically healthy or rehabilitated and that his bonds will be able to be repaid in full .


Junk bonds have played a prominent role in funding the US merger wave since 1980. Almost 20% of corporate acquisitions funded with corporate bonds in 1985 were funded with junk bonds. The company , which wanted to take over another company in a hostile way, founded a holding company that had hardly any assets of its own . High-yield bonds were then issued to finance the takeover of the company with the equivalent of the scrap bond issue. If the hostile takeover was successful, the bonds were redeemed from the assets of the acquired company. If the attempted takeover failed, the holding company went bankrupt and the speculators only got back part of the capital originally invested.

Junk bonds were also used for financing of outs Management buy- and leveraged buyouts . In both cases, the company acquirers did not have the capital required to finance the purchase price, and in some cases had to issue junk bonds for financing. National debt crises have also led to government bonds being classified as junk bonds due to the poor creditworthiness of the state. These included the financial crises , especially during the Argentina crisis and the Greek crisis . Many creditors of government bonds (states, banks, insurance companies, private individuals) had acquired these bonds at a time when the debting states still had acceptable ratings. Investors had to watch their risk worsen as the national crises worsened and even debt relief worsened. So it is not true that early investors consciously took higher risks. “Born junk bonds” are usually the only form of fundraising for companies or countries with economic difficulties, as banks no longer want to take the higher credit risk and no longer grant loans and equity issues may no longer be placed.

Investing in junk bonds is part of a speculative portfolio . Such financial products should only be bought as an addition to lower-risk forms of investment. Due to the high volatility, it is advisable for private investors to closely monitor their performance . You can spread the risk by acquiring shares in specialized investment funds that pursue the purchase of junk bonds as part of their investment strategy .

Commercial law aspects

If bonds that are downgraded to speculative ("junk status") are held by accounting companies, a 100% probability of repayment can no longer be assumed for accounting purposes. In Germany, a distinction must be made between non-banks and credit institutions .


The principle of prudent valuation is standardized in Section 252, Paragraph 1, No. 4 of the German Commercial Code; in particular, all foreseeable risks and losses that arose up to the balance sheet date must be taken into account. Specifically, then in § 253 required para. 4 HGB that securities of current assets with the resultant of the reporting date lower stock exchange or market price are to be (strict lower of cost ). Are the toxic assets in the financial system assets, they are according to § 253 para. 3 HGB only expected permanent impairment to non-scheduled depreciation to correct ( mild lower of cost ).

According to IAS 39.58, receivables are considered to be impaired if there is objective evidence of an impairment loss. A receivable or a group of receivables is deemed to have been impaired and an impairment loss has arisen if:

  • there is objective evidence of impairment as a result of a loss event that occurred after the financial instrument was first recorded and up to the balance sheet date (loss event),
  • the loss event had an impact on the estimated future cash flows of the financial asset or group of financial assets, and
  • a reliable estimate of the loss amount can be made.

IAS 39.59 exemplifies some loss events such as significant financial difficulties of the debtor or breach of contract. If there is objective evidence of an impairment, the security must be written off with an effect on income (IAS 39.63).

Credit institutions

At banks, it must be checked whether the junk bonds are booked in the financial assets ( banking book ), belong to the liquidity reserve or form part of the trading portfolio ( trading book ). For securities that are activated in the banking book, the moderated lower value principle of Section 253 Paragraph 3 HGB applies, while securities in the liquidity reserve and the trading book are valued in accordance with Section 253 Paragraph 4 HGB. For securities in the trading book, Section 340e (3) HGB ( fair value principle ) also applies . Reclassifications of securities from the trading portfolio to the investment portfolio are not permitted, unless exceptional circumstances, in particular serious impairment of the tradability of the financial instruments, result in the bank giving up its trading intent (Section 340e (3) sentence 3 HGB). According to IAS, for valuation purposes it must be assumed that the junk bonds are being traded on an inactive market because buyers and / or sellers have withdrawn completely and for a longer period and market liquidity can no longer be determined.


In "Junk Convertibles" has the creditworthiness of the issuer since issuance of the convertible bond , deteriorated such that in addition to the share price and the net present value ( english Straight Value ) of the promised interest and principal payments due of widening credit spreads fell sharply. Their value is based almost entirely on the (low) probability of the bond component being repaid. The worse the issuer's creditworthiness, the higher the credit spread and the lower the value of the bond component or the straight value . This means that the creditor of a convertible bond is also subject to the risk of total loss if the creditworthiness of the issuer falls and its share prices fall.

See also

Individual evidence

  1. ^ Edward I. Altman: The Anatomy of the High-yield Bond Market , in: Financial Analysts Journal, 1987, pp. 12-25.
  2. ^ Paul Asquith / David W. Mullins Jr / Eric D. Wolff: Original Issue High-yield Bonds: Aging of Analysis of Defaults, Exchanges and Calls , in: Journal of Finance 44, 1989, pp. 923-952
  3. ^ Marshall E. Blume / Donald B. Keim: The Myths and Reality of Low-grade Bonds , Working paper, Wharton School of the University of Pennsylvania, 1991
  4. Standard & Poor's: Rating Methodology: Evaluating the Issuer , April 2009, p. 26: “While companies with investment-grade ratings generally have ready access to external cash to cover temporary shortfalls, junk-bond issuers lack this degree of flexibility and have fewer alternatives to internally generated cash for servicing debt. "
  5. Jump up ↑ Harlan D. Platt, The First Junk Bond: A Story of Boom and Bust , 2002, p. 16.
  6. Charles R. Geisst, The Wall Street history , 2007, p 383
  7. ^ Mary Zey: Banking on Fraud: Drexel, Junk Bonds & Buy Outs , 1993, p. 15.
  8. Charles R. Geisst: The history of Wall Street , 2007, p 382, respectively.
  9. ^ A b Philipp Schott: Effects of leveraged buyouts on the bond market , 2008, p. 7 f.
  10. Charles R. Geisst, The Wall Street history , 2007, p 407
  11. Torsten Recke u. a., Rise and Fall of the Titans , 2008, p. 11.
  12. Capital, Volume 37, 1998, p. 233
  13. Roger Zantow / Josef Dinauer: Finanzwirtschaft des Unternehmens, The basics of modern financial management , 4th updated edition, Munich, Pearson Studium Verlag, 2016, p. 263.
  14. Roger Zantow / Josef Dinauer: Finanzwirtschaft der Unternehmens , 2016, p. 263.
  15. Charles R. Geisst: The history of Wall Street , 2007 S. 388th