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Investors willing to embrace risk in the pursuit of high yield may want to consider sprinkling some junk bonds into their income portfolios. Although closed-end funds (CEFs) offer the average investor broader diversification to baskets of non-investment-grade corporate debt (often at a discount to NAV), we offer some individual ideas to consider:

Harrahs Operating Co.: These bonds were trading at 76 cents on the dollar last March. They are now 48 cents, with a gushy yield of 27.5%.

HET.GO

413627AX8

Harrahs

6.50

June 1,
2016

Ca

CCC

C

48.250

-

27.576

Casino operators are highly leveraged, and Harrahs (now Caesar’s Entertainment) carries more debt than most, thanks to a poorly timed and expensive LBO in 2008. Naysayers were convinced the company would be forced to file bankruptcy, but the company’s survival thus far is the result of shrewd financial engineering this past two years. In addition, anecdotal evidence of recent improvement in Las Vegas gaming revenues helps to assuage (in part) our near-term concerns of default.

While Caesar’s lacks the hot-spot Macao presence of Wynn Resorts (NASDAQ:WYNN), MGM Resorts Intl. (NYSE:MGM) and Las Vegas Sands (NYSE:LVS), its Total Rewards customer loyalty program remains the model of customer relations management to which all other operators aspire. For aggressive investors willing to roll the dice, we think Harrahs could be a potentially rewarding bet.

ServiceMaster: For more than eighty years, ServiceMaster has provided diverse commercial and residential services to “simplify and improve the quality of their customer’s lives.”

Their brands cover a wide spectrum of services, including home/business cleaning and maintenance, disaster restoration, lawn/landscaping and termite/pest control.

Buried deep in the junk heap is a ServiceMaster bond trading for eighty cents on the dollar and yielding almost ten percent. Taken private in 2007, the company also suffered from the burden of a poorly timed leveraged buyout.

SVM.GB

817609AB6

Service-
Master

7.45

Aug. 15,
2027

Caa1

B-

NR

80.100

3.547

9.994

Yet the company made it through this recession, and its brands hold market-leading presence in most areas. The eradication of vermin has plagued mankind for centuries, and will always be a “growth” industry. For this reason alone, we find these bonds interesting.

For investors seeking a yield kicker to boost income streams, we think getting paid almost ten percent for B- credit seems more than fair compensation for the risk. This is especially true in a bond market where spreads between investment grade and non-investment grade debt remain fairly tight.

Motorola (Now Motorola Solutions):

MOT.GH

620076AM1

Motorola
Solutions

5.22

Oct. 1, 2097

Baa2

BBB

BBB

72.856

-1.067

Admittedly, these “debentures” stretch the maturity dateline well beyond our lifespan, or that of your children. However, the iconic communications equipment company has gone through vast changes since its humble beginnings in 1928.

Last year, the company split itself into two operating entities, Motorola Mobility (NYSE:MMI) and Motorola Solutions (NYSE:MSI). This bond is attached to MSI. Ironically, the “debs” are still rated investment-grade, but at BBB they’re on the lower end of the spectrum.

The current 6.3% yield is appealing and at seventy-two cents on the dollar, there could be some potential capital appreciation and total return opportunity down the road.

Wendy’s International: Our last bond idea is for fast food enthusiasts. We began nibbling at the debentures due in 2025 back in late 2009 as a way to participate in the turnaround story being implemented by management of the then combined Wendy’s/Arby’s Group controlled by the Nelson Peltz-led Triarc Companies.

WEN.GB

950590AG4

Wendy's

7.00

Dec. 15, 2025

Caa1

B-

NR

88.250

-1.070

8.450

At the time we felt owning the debt would be preferable to the equity from a risk/reward perspective. On July 5, 2011, Arby's was acquired by Roark Capital Group, an Atlanta-based private equity firm that focuses on investing in franchise, brand management and restaurant companies.

These bonds due in 2025 are also a bit further out on the maturity limb than we prefer, and its B- credit rating doesn’t exactly leave us feeling warm and fuzzy. However, if the company can continue on its path of progress, then we believe the current 8.45% yield is reasonable compensation for the wait.

Summary

Although default rates for high-yield corporate debt have fallen dramatically, each of the bonds discussed in this article do carry substantial risks, including potential violation of covenants, default or bankruptcy.

The cardinal rule in high-yield investing is: If you cannot afford to lose money, stay away! But, for the adventurous spirit looking to put some cash to work, or the yield-hunter wanting to splash some color into their income mix, adding a pinch of one or more of these ideas could spice up your portfolio.

Disclosure: All bonds mentioned are current holdings.

Source: High-Yield Finds From The Junk Bond Bin