Las Vegas was not always the investor-owned entertainment venue it is today. Prior to the 1970s, most of the valuable property in the city was built and maintained by organized crime. It was not until the 1970s, and creative investors such as Steve Wynn, that Sin City began saying goodbye to mobsters in favor of Wall Street investors.
Steve Wynn was the first investor to make use of the junk bond in Las Vegas. He raised some $160 million, through the since-disgraced Michael Milken, to build the new Golden Nugget casino. Upon selling the Golden Nugget, Wynn turned to junk bonds again to raise more than $500 million for construction of the Mirage. Since then, other investors have followed suit. It is clear that the Las Vegas of the 21st century would not be what it is without junk bonds.
All about Credit Rating
From a technical and legal aspect, a junk bond is no different from an investment grade bond. Junk bonds get their name from the credit rating of the company issuing them. A credit rating of BB or lower is considered a junk rating. Anything higher is investment grade. So why would anyone invest with a company offering a junk rating? It comes down to return.
A lower credit rating means the issuing company has to offer a higher return in order to attract investment funds. The investor is willing to risk a higher chance of default in order to enjoy that greater return. With both sides being willing to give a little, junk bonds allow companies with less-than-stellar credit ratings to raise the financing necessary to reach their goals. That is exactly what happened in Las Vegas.
There is no reason to be scared away from junk bonds if you are an individual investor. However, you should approach these bonds with caution. Do your homework, get a lot of advice, and be sure you are willing to lose the entire amount you invest before you purchase. You will likely do very well with a good junk bond strategy — but you could lose everything.