Fallen Angel
What Is a Fallen Angel?
A fallen angel, in the investing world, is a bond that was initially given a venture grade rating yet has since been decreased to junk bond status. The downgrade is brought about by a decay in the financial condition of the issuer.
The term is likewise sometimes used to depict a stock that has fallen sharply from its all-time highs.
Fallen Angel Explained
Fallen angel bonds have been downgraded by one of the major rating services, which incorporate Standard and Poor's, Fitch, and Moody's Investors Service. They might be corporate, municipal, or sovereign debt.
The primary justification behind a downgrade is a decline in revenues, which imperils the ability of the issuers to pay the interest due on their bonds. On the off chance that the declining revenues are combined with expanding levels of debt, the potential for a downgrade increases dramatically.
Fallen angel securities are frequently appealing to contrarian investors seeking to capitalize on the potential for a company to recover from an impermanent mishap. Under these conditions, the downgrade interaction usually begins with the company's debt being put on a negative credit watch. That by itself powers numerous portfolio managers to sell their situations, as their overseeing rules might prohibit holding them.
Junk Status Drives Selling
The genuine downgrade to junk status drives seriously selling pressure, especially from funds that are restricted to holding speculation grade debt only. Subsequently, fallen angel bonds can introduce value inside the high-yield category however provided that the issuer seems to have a reasonable chance of recovering from the conditions that caused the downgrade.
Fallen Angels Funds
There are even fallen angel bond funds for investors who spot opportunity at a fire sale. The VanEck Vectors Fallen Angel High-Yield Bond ETF puts just in bonds that have been downgraded. As of September 2021, its holdings included bonds from Sprint Capital Corp., Vodafone Group PLC, and Freeport McMoran, among others. There likewise is the iShares Fallen Angels USD Bond ETF which, as its name recommends, puts just in dollar-designated fallen angels.
The Risks of Investing in Fallen Angels
An oil company that has reported supported losses more than several quarters due to falling oil prices might see its venture grade bonds downgraded to junk status due to the company's increased risk of default. Because of the downgrade, the prices of the company's bonds will decline and its yields will increase. That makes them appealing to contrarian investors who consider low oil prices to be an impermanent condition.
Municipal bonds from troubled urban communities with declining tax revenues are at risk for being downgraded.
A few fallen angels don't return. For instance, a company will experience declining revenues on the off chance that a better product than theirs shows up on the market. Assuming the company neglects to advance, it won't return. The movement from VCR tapes to DVDs to web based video is a model.
Municipal and sovereign debt issuers may likewise see their speculation grade bonds downgraded to junk status due to a combination of stale or declining tax revenues and expanding levels of debt. These conditions can make a descending spiral toward default as debt repayments eat into declining revenues but more bonds are issued to cover the shortfall.
Sometime, that municipal or national government will miss a payment.
Highlights
- Its bonds pay higher returns than venture quality bonds however are riskier.
- Some bond funds and ETFs center around fallen angels.
- A fallen angel is a bond that has been diminished to junk status in light of the fact that its issuer experiences fallen into financial difficulty.
