Editor's note: Some of the world's greatest investors wait for moments like this...

Cracks are starting to appear in corporate "debt dams" today. And the longer companies are forced to deal with the COVID-19 pandemic, the worse the situation will become...

But folks like Warren Buffett, John Paulson, Sam Zell, and Wilbur Ross, aren't worried at all. These billionaires are doing the exact opposite of most investors today... They're raising cash.

Then, as soon as the next crisis arrives, they'll pounce... They'll use a little-known, sophisticated type of investment to make more money than you ever thought possible.

In today's Masters Series – which comes from an updated Stansberry's Credit Opportunities report – editor Mike DiBiase shares the "secret" of these world-class investors... explains what we can expect in the next crisis... and details what you can do to prepare today...

The World's Greatest Investors Use This 'Secret' to Thrive During a Crisis

By Mike DiBiase, editor, Stansberry's Credit Opportunities

The world's smartest investors don't lose sleep during a crisis...

That's because they are prepared. They take advantage of a sophisticated type of investment that most investors know nothing about. And they use it to make loads of money when everyone else is selling.

This "secret" investment is a type of corporate bond called a distressed bond...

These bonds are different from the "bonds" in your 401(k). They have nothing to do with "bond" mutual funds... U.S. Treasury bonds... or bonds issued by blue-chip companies like Apple (AAPL), which are little more than a way to park money and earn 2% interest.

First, let's go over the basics of corporate bonds...

Corporate bonds are loans made to companies by the public. They're typically issued in increments of $1,000. That's known as the "par value" or "principal" of the bond.

Unlike a share of a stock, a bond is a legal contract between the issuer (company) and the buyer of the bond. That makes them much safer than stocks. The buyer is legally entitled to collect the full $1,000 par value on the stated maturity date of the bond.

Along the way, the buyer is also entitled to receive regular interest payments (usually every six months) for lending the money. The company doesn't have a choice... It has to pay you.

That's how bonds work. And most bonds are pretty ordinary investments... They yield between 2% and 5%, on average, per year – almost exclusively from the interest.

Most bonds, once issued, trade regularly on the secondary market. Their prices are determined by supply and demand. Here's the important thing to remember... Regardless of what you pay for the bond, your legal right to collect interest payments and the $1,000 principal at maturity doesn't change.

Some bonds trade for less than the $1,000 par value. When that happens, in addition to the interest you earn, you can also earn capital gains. That's the difference between the par value and the price you pay for the bond.

Yield to maturity ("YTM") is a key term you need to understand when buying bonds...

It's simply the annualized return you can expect to receive if you hold the bond to its maturity. YTM is a combination of the interest you'll receive while you hold the bond and the capital gains you'll earn when you're paid the full $1,000 par value at maturity.

Bonds are much simpler and easier to analyze than stocks. That's because they're binary.

With corporate bonds, you only have two possible outcomes: The company either pays you what it owes you, or it doesn't. That's it... Because you know exactly when and how much you are going to get paid, you can completely ignore daily fluctuations in the price of the bond after you've bought it.

As long as the company pays you all of your interest and principal, you know the return you'll make on your investment at the time you buy the bond. It's the complete opposite with stocks, where you only know your return when you sell them.

If the company doesn't pay you what you're owed on a bond, it's considered to be in "default" on its debt... and lenders can force it into bankruptcy.

So when buying a corporate bond, the only question is: Will the company stay in business and pay you all of your interest and principal through maturity?

It's really that simple.

Distressed bonds are different from most corporate bonds in one critical way... They trade for a fraction of their contractual value – at discounts to par value from 10% to more than 70%.

Despite their lower prices when you buy them, these distressed bonds work the same way as any other bond...

The companies that issued them have the same obligation to pay you $1,000 at maturity, even though you only pay a fraction of the usual $1,000 cost. That enables you to earn large, equity-like capital gains on a much safer investment vehicle than stocks. Plus, you collect interest payments that can be up to 20% per year of the amount you invested.

Most people don't know that it's possible to buy this type of bond as an individual investor...

The key to this type of investment is knowing which bonds will pay you, and which ones won't. If you can find distressed bonds that you know will be paid in full at maturity, you can make massive, equity-like returns with far less risk than investing in the stock market.

But finding truly great, safe distressed bonds with extraordinary returns is extremely difficult most of the time. It's much easier in rare moments of crisis... like the one we're about to enter. The coming crisis will make it possible to buy high-quality bonds for $0.60... $0.50... even as little as $0.30 on the dollar.

That's partially because of investors' herd-like mentality...

Just like stocks, bonds trade in a public market that is heavily influenced by emotions and liquidity. When enough investors become fearful, panic sets in... And everyone starts to sell.

But there's another major reason that the bond market reacts violently in times of crisis...

You see, most corporate bonds are not held by individual investors. Instead, they're held by big institutions like mutual funds, pension funds, and insurance companies. These institutions have policies that require their holdings to be rated "investment grade."

Credit-ratings agencies assign a rating to most bonds, depending on how safe they believe the bonds to be. Ratings range from "AAA" (safest) all the way down to "CCC" (riskiest).

The lowest rung on the investment-grade ladder is "BBB-." When a corporate bond with a "BBB-" rating gets downgraded, it gets moved into "noninvestment grade" or "junk" status ("BB+" or lower). When that happens, big institutional investors are forced to sell their positions.

This is important because roughly half of all investment-grade bonds today are rated "BBB" (in the range of "BBB+" to "BBB-").

That number has quadrupled over the past decade. That's because companies are much more heavily indebted today. Many can barely afford their interest payments.

Companies downgraded from investment grade to junk are known as "fallen angels." Fallen angels are a fertile ground for finding good distressed-debt opportunities...

Thousands of portfolio managers will be forced to sell their safe bonds for no other reason than that they've been downgraded by the credit agencies. And since the bond market is much less liquid than the stock market, there aren't enough buyers to absorb the increased supply. Massive selling will force prices much, much lower... And these safe bonds will trade for pennies on the dollar.

Now, let's go over how we analyze if a bond is safe...

Can It Pay Us?

We only care whether a company can pay our interest and principal. That's all that matters when investing in bonds. We always analyze two factors to determine if a company can do that...

1. Whether the company can afford the annual interest costs on all of its debt

2. Whether it will have enough cash on hand to pay off our bond at maturity

The first factor is the most important... If the company can't afford to pay the interest on all of its debt (not just our bond), its lenders can force the company into bankruptcy. We'll never recommend a bond from a company that we believe will go bankrupt before our bond matures.

To address the first factor, we look at the company's "interest coverage ratio." For us, that's how many times the company's cash profits cover its interest costs. (Cash profits are the cash that a company produces from its core operations. The metric can be found in a company's statement of cash flows under the "net cash provided by operating activities" line.)

The formula most lenders and analysts use to measure interest coverage is accounting earnings before interest and taxes ("EBIT") divided by interest expenses. We like to use cash profits before interest instead. Unlike accounting earnings, cash profits can't be faked. That's because cash profits don't include any estimates that can be easily manipulated by management.

We like to see interest-coverage ratios of at least 2 times...

That tells us the company can safely afford its interest payments with enough cushion to absorb unforeseen downturns in its business.

In addition to telling us whether the company can afford its interest payments, this ratio also gives us a gauge as to how easily the company can refinance its debt... Banks want to make sure they will get paid their interest, too. The lower the ratio, the more difficult it will be to refinance and the higher the interest rate the company will have to pay.

The answer to the second question tells us how the company will pay us our principal when it's due. If we project that the company won't have enough cash in the bank at maturity to pay our recommended bond, we know it will need to refinance its debt with other loans to pay us. If that's the case, we look for companies that should have no trouble finding additional financing when the time comes.

We don't care how we get paid, as long as the company is able to pay us.

In addition to these two factors, we also want to know our worst-case scenario... what would happen in case of a bankruptcy. So we perform a liquidation analysis for every bond.

We assume the company will be forced to shut down its business and sell off all of its assets at some point in the future. We estimate what these assets would be worth in a forced sale.

Then, we allocate the sales proceeds to the company's lenders. Banks typically get paid first. Bondholders, along with other unsecured creditors like employees and vendors, typically get paid after all senior and secured creditors are paid.

The good news is... unlike stocks, most bonds aren't worthless in a bankruptcy. On average, bondholders have historically recovered about $0.40 on the dollar in bankruptcies.

As we explained, we'll never recommend a bond that we believe is in danger of bankruptcy before we get paid. Still, we can't guarantee that it will never happen. Every investment comes with some level of risk. That's why we look for returns that are high enough to compensate us for taking on these risks.

Now that you know what a distressed bond is and how to determine if it's safe, we want you to understand why this is an exciting time to be a distressed-debt investor...

You see, we're very close to the environment we've waited for since we launched Stansberry's Credit Opportunities back in November 2015.

We're approaching a new credit crisis where many companies will fail and bond prices will collapse. However, you must understand this...

Not every company with a bond whose price has collapsed will default. In a crisis, even companies that are perfectly capable of repaying their debt see their bond prices beaten down.

And we believe you could see some of the best opportunities of your lifetime in the coming months.

Start preparing today... before it's too late.

Regards,

Mike DiBiase

Editor's note: You don't want to miss the rest of this brand-new report. In it, Mike and his colleague Bill McGilton dive deeper into why the next crisis will be worse than anything we've ever experienced... and why it will also lead to some of the best opportunities ever.

If you subscribe to Stansberry's Credit Opportunities today, you'll get instant access to this report... which also details three of Mike and Bill's favorite ways to profit from this strategy. And of course, you'll get everything they publish in this service for the next 12 months.

But we get it...

If you're like most folks, you probably don't want to hear anything about bonds while the good times keep rolling. You're likely skeptical about how much this strategy can help you.

Fortunately, you don't have to just listen to us... One of our longtime subscribers recently shared his story about how our corporate-bond research changed his life. Get all the details right here (including how you can get this research at its lowest price EVER right now).