Editor's note: Retailers Sears and Toys "R" Us are just the first major dominoes to fall...

In the coming years, the biggest wave of corporate bankruptcies in U.S. history will unfold. And as Stansberry's Credit Opportunities editor Mike DiBiase detailed yesterday, that will open the door to tremendous opportunities to profit... if you know where to look.

In today's Masters Series – compiled from the June issue of Stansberry's Credit Opportunities and a recent special report – Mike concedes that not everyone believes we're in imminent danger. But as he explains, it's hard to argue with the facts...

The Only Question That Will Matter When the Next Crisis Arrives

By Mike DiBiase, editor, Stansberry's Credit Opportunities

Longtime Stansberry Research readers likely know all about Marty Fridson...

He's one of the most respected researchers and authors in the field of high-yield (or "junk") debt. Because of his success, he is often referred to as the "dean of high-yield debt."

Today, Fridson is the chief investment officer at investment-advisory firm Lehmann, Livian, Fridson Advisors. And each year, he hosts the High Yield Bond Conference in New York...

As you might expect from its name, during the two-day conference, speakers share their research and opinions on topics related to high-yield debt. This year, the event included speakers from credit-ratings agencies S&P and Moody's (MCO), investment banks JPMorgan Chase (JPM) and Wells Fargo (WFC), law firms specializing in bankruptcy, and Fridson.

The event is a great way to "take the pulse" of insiders in the bond market, while keeping up with the latest research on the space. That's why I made the trip in June...

Overall, the tone at the conference was surprisingly optimistic. Most of the speakers – including Fridson – don't think the junk-bond market is as dangerous as the mainstream media portrays. They don't believe the next recession and correction in the credit markets will be nearly as bad as the last one. And they don't think it'll happen within the next year.

With all due respect to Fridson and the other presenters, I don't agree.

We've been down this road before. In all the years leading up to the last financial crisis, outside of one presenter anyone at Stansberry Research can remember, neither Fridson nor any of his many presenters saw the collapse in credit coming... let alone its severity.

And that's understandable... Most of the speakers at conferences like this are entrenched in their respective industries. They have great reputations. They don't want to stick their necks out by making bold predictions that could tarnish what they've built for years or decades.

All these opinions aside, no one can argue with the facts... Corporate debt is at an all-time high. And the quality of that debt is much worse than it was before the last financial crisis.

As this situation plays out in the months and years ahead, you can continue to rely on Stansberry Research for the unfiltered facts and our unbiased opinions about what's coming.

As always, every month in Stansberry's Credit Opportunities, we'll scour the universe of U.S. corporate bonds and search for outliers... bonds priced far too low for their level of risk. And as always, when we're analyzing whether a bond is safe for us to recommend buying, we'll continue to focus on a single important question... 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 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, and
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 the statement of cash flows under the "net cash provided by operating activities" line.)

The formula most 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 management can easily manipulate. You can't fake cash.

We like to see interest-coverage ratios of at least two 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 difficult it will be for the company to 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.

By addressing the second factor, we can figure out whether 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 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 is forced to shut down its business at some point in the future and sell off all of its assets. We estimate what these assets would be worth in a forced sale.

Then, we allocate the sales proceeds to the company's lenders. Some lenders – like 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, bonds aren't worthless in a bankruptcy. On average, bondholders have historically recovered about $0.40 on the dollar in bankruptcies. For some of the bonds we've recommended, the amounts we estimate we'd recover in a bankruptcy are higher than the prices we paid for the bonds.

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 must always look for returns that are high enough to compensate us for these risks.

And remember, as we've explained this weekend, we believe a new crisis is approaching...

That's why we launched Stansberry's Credit Opportunities in November 2015. Since then, we've recommended 30 bonds and closed 20 positions with an 85% win rate. Keep in mind... these recommendations all have legal protections that no stock can ever offer.

Meanwhile, the average annualized return of our closed positions is 20.9%. That's almost two and a half times better than the overall junk-bond market's return. If you had instead invested in the largest high-yield bond exchange-traded fund, the iShares iBoxx High Yield Corporate Bond Fund (HYG), you would have earned just 8.4% in the same span.

We even beat the return of the stock market... The S&P 500 Index's weighted return during the same period is 17.1%. And we accomplished this while taking on far less risk.

Keep in mind... we've booked these impressive gains before any panic has set in. The biggest opportunities are still ahead of us. But that doesn't mean you can't profit today.

Regards,

Mike DiBiase

Editor's note: Porter has tried for years to show Digest readers that buying corporate bonds is both far safer and far more lucrative than buying stocks. But sometimes, you just need proof... That's why we recently handed the "mic" over to an ordinary subscriber. He revealed how this strategy helped him retire at age 52. Watch his presentation right here.