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Who Wouldn’t Want To Buy An Investment Paying 11% And Sold By Goldman Sachs?

March 2, 2016 Blog

With fear bubbling in the junk bond market, it turns out that very few investors have interest in the latest Goldman offering. In fact, investors are currently losing their appetites for junk bonds altogether.

Perhaps investors are leery of junk bonds at the moment because they know the promise of such heady returns often comes with massive headaches.

Such is the case with the reported Goldman investment backing the leveraged buyout of the software firm, Solera Holdings, Inc.

Last week, Goldman was struggling to sell $2 billion in Solera bonds, according to the Wall Street Journal. The Journal reporters, Sam Goldfarb and Liz Hoffman, characterize the lack of investors’ interest in the deal as “another sign of cracks in the market for the low-rated debt that has been a key driver of the takeover boom.”

The Solera deal is an indicator that the recent junk bond boom could be dying as risk-averse investors either back away from risky securities or demand sweeter terms, according to the Journal.

Rather than clamoring to get a piece of an exclusive Goldman deal, investors are shying away. Thus, Goldman will probably have to keep the Solera bonds on its own balance sheet.

The Journal also reported that Toys “R” Us is rushing to refinance $1.6 billion in junk bonds maturing in 2020 before the junk bond climate worsens. Defaults are expected to rise this year, according to the Journal report. If investors don’t buy into these deals or the bonds are not refinanced, the defaults on the bonds become likely.

As the default risk soars, so does the interest paid to investors, reaching 10% or even 11% as in the case with Goldman’s Solera deal.

Investors are becoming wary of higher-rated debt as well. CNA Financial, an insurance carrier is rated investment grade but recently trimmed the size of a bond offering and raised the interest rate after investors balked at the initial terms, according to the Journal.

Government officials see the dangers in the bond market, too.

Federal Reserve Chairwoman Janet Yellen testified last month before Congress that “higher borrowing costs for riskier firms” are among the factors that could hurt economic growth this year.

It is likely that the chickens will come home to roost for investors whose financial advisors have been pitching junk bonds to them as a source of higher yield. We’ve already seen multiple energy and commodity company defaults and the crash of Third Avenue, a mutual fund loaded with junk bonds. God only knows what’s next, perhaps even money market accounts are at risk. Indeed, junk bonds will likely keep investment fraud lawyers busy this year.

The old maxim, if it sounds too good to be true – like an 11% yield – it likely is. The market right now is saying loudly and clearly that investors should beware high-yield or junk bonds. Such junk bond markets are currently reinforcing one of the most important lessons for investors: high-yield typically equals high-risk.

Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.