Junk Bonds Grow More Popular And Turn Even Riskier

Junk bonds are living up to their name again. Companies with junk credit ratings have been increasingly issuing bonds for riskier purposes that could hinder their ability to pay back bondholders. Demand for junk bonds has touched record levels this year as investors reach for their rich yields, a stark contrast to the meager returns available on Treasury securities and money market accounts. But the voracious demand has allowed companies to easily raise money for things that may actually end up weakening them...

Then there are the bonds issued to pay dividends to a company’s private equity owners. The hospital company HCA borrowed $2.5 billion on Oct. 16, in part to make payments to its three private equity owners — Kohlberg Kravis Roberts, Bain Capital and Merrill Lynch Global Private Equity. Mr. Penniman said that deals like this, in isolation, increase a company’s debt and make it harder to fulfill its obligations to bondholders.

A spokesman for HCA, Ed Fishbough, said: “We’re pleased with the response to our offering” from investors, and also with the company’s debt levels. The trend that worries investors most is the rise of bonds that allow the borrower to skip cash interest payments if it hits financial trouble, removing one of the most attractive features of bonds: the guaranteed fixed income...