Bank of America Corp (NYSE:BAC) – TLB, the bond that matters
At the moment, Bank of America Corp (NYSE:BAC) is one of the dominants in the Term Loan B (TLB) market. The other global bank who is a biggie in this segment is JP Morgan. Now, Australia’s largest bank, National Australia Bank and Wells Fargo are considering a partnership to bring OZ’s borrowers to the United States TLB market.
“Bond”ing with a company
Bonds, stocks and mutual funds are the raft of securities that you can divert your money to. And the TLB or the “Junk Bond” is probably the most dubiously named one. When you own stock, in effect you are a partial owner of a company. Bonds, on the other hand are loans. Purchasing a bond is your agreeing to lend the bond issuer money. This could be to a government or a company. In return the issuer promises to pay back the loan plus the interest by maturity date and that interest comes to you, generally every six months. That’s exactly why bonds are referred to as fixed-income securities. On the other hand, stocks carry variable returns.
Why opt for “Junk”?
Companies that had low credit ratings tended to issue bonds while companies with a longer and more impressive track record issued investment-grade bonds. The credit-starved companies were willing to pay high interest rates because that’s the only way they could attract cash from investors. Since they offered such high return rates, they were also euphemistically referred to as “high-yield bonds”.
The junk route
Junk bonds have risen with the tide and ebbed as well. Prior to the 1980’s hardly any companies issued them. It was only well-established companies who were seeing bad times that actually offered them. It was at that point that Michael Milken aka “Junk Bond King”, an ambitious trader, came to the fore and the tidal wave of junk bonds rose and crashed within under a decade. The skyrocketing default rates meant that no investors were even willing to touch them with a yardstick. However, it seems like all that is a forgotten story and investors are now willing to test the “junk bond” waters once again and have been making a beeline for these volatile securities and strong companies are offering them as well. However, keep a sharp-eye on their ratings before actually making the plunge.