June 13, 2019

Fallen Angels in the US credit market

A Fallen Angel is a corporate, or sovereign, bond downgraded from Investment Grade (IG) (minimum rating of BBB- with S&P, Moody’s or Fitch) to a High Yield credit rating (of BB+, or below with S&P, Moody’s or Fitch). Thus, the downgrade from Investment Grade (IG) to High Yield (HY) is far more significant than a downgrade for a bond staying within the same asset class. Fallen Angels tend to have higher credit-beta than other HY issues as a result.

Given the distinct nature of the two asset classes, even the risk of an issue leaving the IG universe can cause advance selling of the bond, because an active IG portfolio manager wishes to avoid being caught with a sub-IG holding. An indexed IG fund has no choice but to sell the FA. These factors may be compounded by institutional investors over-reacting to the bad news of the downgrade.

Read this paper to learn more about:

- The characteristics of fallen angels versus other high yield issues
- Why fallen angels have shown higher risk-adjusted returns than other high yield issues
- Fallen Angel Bond Indexes, timing and empirical evidence
- Return and performance characteristics
- Size of the Fallen Angel sector in the Corporate Bond market
- Caveats and concerns about the fallen angel asset class
- Covenant protection
- Sector-specific nature of fallen angel spikes
- Risks for investors − when do fallen angels become value traps?